Getting the Neo-Fisherites wrong

In response to the the Neo-Fisherite view that persistently low interest rates leads to low inflation, Nick Rowe writes that we have to see what happens to the money base in order to determine inflation. He implies that the Fisher Effect has to have an explanation based on the growth rate of the money supply.

My response to him is that the money base is not the important factor. But rather, the portion of the money base that is circulating or is not circulating. and why?

Then Paul Krugman today responds to Nick Rowe showing that the money base can grow and still inflation will not appear by giving the example of Japan. The US is another example too though.

But then Paul Krugman ends his post by saying…

“The neo-Fisherites are flailing about, trying to find some reason why the inflation they predicted hasn’t come to pass…”

Obviously Paul Krugman does not understand the Neo-Fisherites. I for one never claimed that inflation was just around the corner. I have been saying that low and stable inflation is settling in. That is exactly what we have been seeing in the US, Europe and in Japan for a long time.

Inflation is actually indeterminate when the nominal rate stays stable for a long time. The result depends on the inflation environment in the economy. Is there investment? Are real rates expected to fall further as in Germany after WWI? Is labor share falling? Is the government investing heavily? and so forth…

So the arguments against the Fisher Effect seem weird… and not relevant.