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Wealth effects, price markups, and the neo-Fisherian hypothesis

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  • Airaudo, Marco
  • Hajdini, Ina

Abstract

The present paper thoroughly investigates the occurrence of positive comovement between inflation and the nominal interest rate conditional on a nominal shock — the so-called neo-Fisherian hypothesis in a New Keynesian framework. By introducing Jaimovich–Rebelo (JR) consumption–labor nonseparable preferences into an otherwise standard New Keynesian model, we show that neo-Fisherianism depends on the extent of wealth effects in households’ labor supply decisions. Neo-Fisherianism appears more prominent in economic environments with weaker wealth effects in labor supply (in particular for Greenwood–Hercowitz–Huffmann preferences where wealth effects are absent), smaller price-to-wage markups (for which the steady state is less distorted), and smaller real wage rigidity. Following a permanent interest rate shock, the neo-Fisherian hypothesis is guaranteed to hold regardless of the utility preferences or degree of real wage rigidity. A more prominent presence of endogenous capital works in favor of neo-Fisherianism. Finally, the stabilizing properties of Taylor rules under JR preferences are scrutinized.

Suggested Citation

  • Airaudo, Marco & Hajdini, Ina, 2023. "Wealth effects, price markups, and the neo-Fisherian hypothesis," European Economic Review, Elsevier, vol. 157(C).
    • Handle: RePEc:eee:eecrev:v:157:y:2023:i:c:s0014292123001113
    DOI: 10.1016/j.euroecorev.2023.104482
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    More about this item

    Keywords

    Monetary policy; Neo-Fisherianism; Wealth effects; Markups;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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