I have recently wrote 2 posts on a model for interest rates and inflation based on the Fisher equation… Nominal rate = real rate + inflation Here is the model that I will overlay actual data to below… (link to previous post) The yellow star represents the Long-run natural target for normalized monetary policy at […]

I wrote a post with many graphs to visualize the various paths that interest rates can take in order to normalize monetary policy in the Long-run. (link to previous post) Here is a basic graph from that post… To recap… Nominal rates on the y-axis. Real rates on the x-axis. Up-sloping lines represent constant rates […]

Let’s go beyond the issue of the Fisher Effect and visualize the whole issue of nominal interest rates, real rates and inflation. The Fisher Effect is only a part of the whole issue. So we start with a model that blends all 3 rates… nominal rates on the y-axis, real rates on the x-axis and […]

Core inflation is low in China… 1.4%. (link) Inflation is always pretty low in China due to weak labor share and weak domestic demand. But there is a concern that inflation will continue to fall as over-productive capacity reveals itself more and more. China is able to produce much more than there is demand for. […]

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. […]

Follow-up post here to John Cochrane’s clarification of the Fisher Effect. In his post, Mr. Cochrane pointed out the different ways (with stability or instability) that inflation could change to changes in nominal rates. His post includes a graph that since the Fed rate hit the ZLB, inflation has been stabilizing… something which supports the […]

John Cochrane responded to recent blogs about the Fisher Effect instigated by Noah Smith. The best thing that John Cochrane showed in his post is that there are short-run effects and long-run effects of policy rate changes upon inflation. The Fisher Effect represents the long-run effects. There are nice comments under his post. “…this is […]

3rd quarter Non-farm Business Sector Labor Share data came out today… 97.34 (2009 = 100) Think of labor share as real unit labor costs, since unit labor costs = labor share * inflation. (link) Labor share is much lower than it was in 2009. The basic measure that I use for the effective demand limit […]

Real rates are currently negative. (0.2% Fed rate minus 1.6% core inflation) Yet the natural real rate is estimated to be around +1.6% due to positive population growth and positive productivity growth. Normally the real rate  returns to its natural level. Will the real rate rise to its natural level in this business cycle? Real […]

Noah Smith opened the debate again on the Neo-Fisherite movement… What is the movement of which I partake as a Neo-Fisherite? When nominal rates are stuck, then changes in inflation will be compensated for by an equal and opposite change in the real rate. The equation is simple… constant nominal rate = real rate + […]