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Monetary Policy and Inflation: Is there a Neo- Fisher Effect? Evidence from Inflation Targeting Countries in Central and Eastern Europe

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  • PleÈ™cău Ioana

    (“Alexandru Ioan Cuza†University of Iasi)

Abstract

In this study we empirically investigate the influence of the low interest rate environmentadopted by inflation targeting countries from Central and Eastern Europe as a rescue measureafter the outbreak of the financial crisis. Moreover, we focus on examining the existence of a NeoFishereffect that may explain the positive relation between interest rates and inflation, withcausality from interest towards inflation rate. We employ a Vector Autoregressive model, togetherwith an impulse response analysis and a variance decomposition technique, to capture theresponse of economic growth and inflation to shocks to the monetary policy. Our main results pointto a negative relation between policy rates and economic growth, as predicted by the economicliterature. However, results show a significant positive relation between interest rates andinflation, meaning that negative shocks to interest rates lead to lower inflation. Also, we find thatthe response of inflation and economic growth is the same, regardless of the crisis or non-crisisperiod.

Suggested Citation

  • PleÈ™cău Ioana, 2017. "Monetary Policy and Inflation: Is there a Neo- Fisher Effect? Evidence from Inflation Targeting Countries in Central and Eastern Europe," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 578-583, June.
    • Handle: RePEc:ovi:oviste:v:xvii:y:2017:i:1:p:578-583
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    References listed on IDEAS

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    1. Papadamou, Stephanos & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2015. "Central bank transparency and the interest rate channel: Evidence from emerging economies," Economic Modelling, Elsevier, vol. 48(C), pages 167-174.
    2. Stephen D. Williamson, 2016. "Neo-Fisherism: A Radical Idea, or the Most Obvious Solution to the Low-Inflation Problem?," The Regional Economist, Federal Reserve Bank of St. Louis, issue July.
    3. Anari, Ali & Kolari, James, 2016. "Dynamics of interest and inflation rates," Journal of Empirical Finance, Elsevier, vol. 39(PA), pages 129-144.
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    Cited by:

    1. Bias Peter V. & Hall Joshua D., 2021. "A Test of Neo-Fisherism: 1964–2019," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(1), pages 221-251, January.
    2. Sevda Yapraklı, 2022. "The Validity of The Neo-Fisher Effect in The Period of Explicit Inflation Targeting: An Econometric Analysis on Turkey," EKOIST Journal of Econometrics and Statistics, Istanbul University, Faculty of Economics, vol. 0(37), pages 85-105, December.

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    More about this item

    Keywords

    interest rates; inflation; Neo-Fisher effect; monetary policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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