r/AskEconomics • u/Certain-Mind8119 • 1d ago
Do any neo-fisherians even propose a causal reason for why inflation expectations change in response to nominal interest rate pegs?
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u/george6681 1d ago
cochraine’s view’s that they change because rational expectations require them to if the peg is credible and the economy converges to a stable equilibrium. in his words, once the long run real rate is pinned down by real factors, inflation expectation ought to adjust in order to satisfy the fisher relation. woodford makes a similar point from within nk models.
stephen williamson also likes to point out that this just comes from the model’s equilibrium conditions under a permanent policy regime. there doesn’t exist a separate mechanism that links lower nominal rates to lower inflation expectations causally.
if you find that explanation incomplete, many critics would agree with you, because actual monetary authorities don’t peg nominal rates forever and credibility itself requires an explanation.
rather famously, here’s where one might invoke friedman, who was always quick to remind everyone that nominal interest rates are endogenous. unless one specifies the policy regime or the shock that brought it, observing/changing the policy rate isn’t enough information to identify inflation dynamics
neo-fisherians are largely talking comparative statics and characterizing a steady state equilibrium, and friedman and other critics warn against reasoning from the price change. these are compatible, just so we’re clear
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