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Neo-Fisherianism in a Small Open-Economy New Keynesian Model

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  • Eurilton Araújo

Abstract

In this study, the Neo-Fisherian hypothesis denotes the positive short-run co-movement between the nominal interest rate and inflation conditional on a monetary policy shock. To investigate the situations in which this hypothesis may arise in a simple small open-economy New Keynesian model, I extend the analysis of Garín et al. (2018) to the framework in Galí and Monacelli (2005). This paper shows that, under relatively high substitutability between domestic and foreign goods, this hypothesis most likely emerges in economies that are more open. Furthermore, targeting CPI inflation accentuates the forces leading to a Neo-Fisherian behavior.

Suggested Citation

  • Eurilton Araújo, 2018. "Neo-Fisherianism in a Small Open-Economy New Keynesian Model," Working Papers Series 481, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:481
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