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The Fisher paradox: A primer

Author

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  • Gerke, Rafael
  • Hauzenberger, Klemens

Abstract

The neo-Fisherian view does not consider a negative interest rate gap a prerequisite for boosting inflation. Instead, a negative interest rate gap is said to lower inflation. We discuss this counterintuitive response - known as the Fisher paradox - in a prototypical new-Keynesian model. We draw the following conclusions. First, with a temporarily pegged nominal rate during a liquidity trap (given an otherwise standard Taylor rule) the model generally produces multiple equilibrium paths: some of these paths are consistent with the neo-Fisherian view, others are not. Second, the unique optimal monetary policy at the lower bound on interest rates, which can be implemented in the model with interest rate rules and state-contingent forward guidance, does not result in a paradox. Third, if the assumption of perfect foresight or rational expectations is relaxed, the model produces an equilibrium that is not consistent with the neo-Fisherian view.

Suggested Citation

  • Gerke, Rafael & Hauzenberger, Klemens, 2017. "The Fisher paradox: A primer," Discussion Papers 20/2017, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:202017
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    References listed on IDEAS

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    More about this item

    Keywords

    Neo-Fisherian; Interest Rates; Inflation; Multiple Equilibria; Rational Expectations;

    JEL classification:

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

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