The Fisher paradox: A primer

Rafael Gerke and Klemens Hauzenberger

No 20/2017, Discussion Papers from Deutsche Bundesbank

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.

Keywords: Neo-Fisherian; Interest Rates; Inflation; Multiple Equilibria; Rational Expectations (search for similar items in EconPapers)
JEL-codes: E31 E43 E52 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-dge, nep-hpe, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/162790/1/893147338.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:202017

Access Statistics for this paper

More papers in Discussion Papers from Deutsche Bundesbank Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().