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New Chicago Views on Inflation Control: The Neo-Fisherian Approach and the Fiscal Theory of the Price Level

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Spahn, P. New Chicago Views on Inflation Control: The Neo-Fisherian Approach and the Fiscal Theory of the Price Level. Credit and Capital Markets – Kredit und Kapital, 52(1), 69-87. https://doi.org/10.3790/ccm.52.1.69
Spahn, Peter "New Chicago Views on Inflation Control: The Neo-Fisherian Approach and the Fiscal Theory of the Price Level" Credit and Capital Markets – Kredit und Kapital 52.1, 2019, 69-87. https://doi.org/10.3790/ccm.52.1.69
Spahn, Peter (2019): New Chicago Views on Inflation Control: The Neo-Fisherian Approach and the Fiscal Theory of the Price Level, in: Credit and Capital Markets – Kredit und Kapital, vol. 52, iss. 1, 69-87, [online] https://doi.org/10.3790/ccm.52.1.69
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New Chicago Views on Inflation Control: The Neo-Fisherian Approach and the Fiscal Theory of the Price Level

Spahn, Peter

Credit and Capital Markets – Kredit und Kapital, Vol. 52 (2019), Iss. 1 : pp. 69–87

1 Citations (CrossRef)

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Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.52.1.69
Language
English
Pages
19
Keywords

Author Details

Prof. em. Dr. Peter Spahn, University of Hohenheim, Institute of Economics, D-70593 Stuttgart

Cited By

  1. A Test of Neo-Fisherism: 1964–2019

    Bias, Peter V.

    Hall, Joshua D.

    The B.E. Journal of Macroeconomics, Vol. 21 (2021), Iss. 1 P.221

    https://doi.org/10.1515/bejm-2017-0234 [Citations: 5]

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  35. Uribe, M. (2017): The Neo-Fisher Effect in the United States and Japan, NBER Working Papers, 23977, Cambridge.  Google Scholar
  36. Williamson, S. (2016): Neo-Fisherism − A Radical Idea, or the Most Obvious Solution to the Low-Inflation Problem? Federal Reserve Bank of St. Louis, The Regional Economist, July, 5–9.  Google Scholar
  37. Woodford, M. (1988): Monetary Policy and Price Level Indeterminacy in a Cash-in-advance Economy, University of Chicago (published in: Economic Theory, 4, 3, 1994, 345–80).  Google Scholar
  38. Woodford, M. (1995): Price-Level Determinacy Without Control of a Monetary Aggregate, Carne­gie-Rochester Conference Series on Public Policy, 43, 3, 1–46.  Google Scholar
  39. Woodford, M. (2003): Interest and Prices − Foundations of a Theory of Monetary Policy, Princeton.  Google Scholar
  40. Woodford, M. (2018): Monetary Policy Analysis When Planning Horizons Are Finite, CEPR Discussion Paper 12968, London.  Google Scholar
  41. Amano, R. et al. (2014): Recent Developments in Experimental Macroeconomics, Bank of Canada Review, Autumn, 1–12.  Google Scholar
  42. Amano, R. et al. (2016): A Primer on Neo-Fisherian Economics, Bank of Canada Staff Analytical Notes, 14.  Google Scholar
  43. Bassetto, M. (2008): Fiscal Theory of the Price Level, in: Durlauf, S. N./Blume, L. E., eds.: The New Palgrave Dictionary of Economics Online. 2nd ed.  Google Scholar
  44. Benhabib, J./Schmitt-Grohe, S. (2001): The Perils of Taylor Rules, Journal of Economic Theory, 96, 1–2, 40–96.  Google Scholar
  45. Blanchard, O. J./Fischer, S. (1989): Lectures on Macroeconomics, Cambridge/London.  Google Scholar
  46. Boneva, L. et al. (2016): The Effect of Unconventional Monetary Policy on Inflation Expectations - Evidence from Firms in the United Kingdom, Bank of England, Discussion Papers, 47, London.  Google Scholar
  47. Buiter, W. H. (2002): The Fiscal Theory of the Price Level - A Critique, Economic Journal, 112, 481, 459–480.  Google Scholar
  48. Buiter, W. H. (2017): The Fallacy of the Fiscal Theory of the Price Level - Once More, CEPR Discussion Papers, 11941, London.  Google Scholar
  49. Bullard, J. (2010): Seven Faces of ‘The Peril’, Federal Reserve Bank of St. Louis Review, September/October, 339–352.  Google Scholar
  50. Bullard, J. (2015): Neo-Fisherianism - Expectations in Dynamic Macroeconomic Models, Federal Reserve Bank of St. Louis.  Google Scholar
  51. Busetti, F. et al. (2017): Trust, but Verify - De-anchoring of Inflation Expectations under Learning and Heterogeneity, ECB Working Papers, 1994, Frankfurt.  Google Scholar
  52. Christiano, L. J./Fitzgerald, T. J. (2000): Understanding the Fiscal Theory of the Price Level, Federal Reserve Bank of Cleveland, Economic Review, 36, 2, 1–37.  Google Scholar
  53. Ciccarelli, M./Osbat, C., eds. (2017): Low Inflation in the Euro Area - Causes and Consequences, ECB Occasional Papers, 181, Frankfurt.  Google Scholar
  54. Cochrane, J. H. (2011): Determinacy and Identification With Taylor Rules, Journal of ­Political Economy, 119, 3, 565–615.  Google Scholar
  55. Cochrane, J. H. (2016): Do Higher Interest Rates Raise or Lower Inflation? University of Chicago.  Google Scholar
  56. De Grauwe, P. (2011): Animal Spirits and Monetary Policy, Economic Theory, 47, 2–3, 423–457.  Google Scholar
  57. Eusepi, S./Preston, B. (2018): The Science of Monetary Policy - An Imperfect Knowledge Perspective, Journal of Economic Literature, 56, 1, 3–59.  Google Scholar
  58. Evans, G. W./Honkapohja, S. (2006): Monetary Policy, Expectations and Commitment, Scandinavian Journal of Economics, 108, 1, 15–38.  Google Scholar
  59. Gabaix, X. (2016): A Behavioral New Keynesian Model, CEPR Discussion Papers, 1729, London.  Google Scholar
  60. García-Schmidt, M./Woodford, M. (2015): Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis, NBER Working Papers, 21614, Cambridge.  Google Scholar
  61. Garín, J. et al. (2018): Raise Rates to Raise Inflation? Neo-Fisherianism in the New Keynesian Model, Journal of Money, Credit, and Banking, 50, 1, 243–259.  Google Scholar
  62. Gerke, R./Hauzenberger, K. (2017): The Fisher Paradox - A Primer, Deutsche Bundesbank, Discussion Papers, 20, Frankfurt.  Google Scholar
  63. Gertler, M. (2017): Rethinking the Power of Forward Guidance - Lessons from Japan, NBER Working Papers, 23707, Cambridge.  Google Scholar
  64. Hagedorn, M. (2011): Optimal Disinflation in New Keynesian Models, Journal of Monetary Economics, 58, 3, 248–261.  Google Scholar
  65. Holtemöller, O. (2008): Geldtheorie und Geldpolitik, Tübingen.  Google Scholar
  66. Illing, G. (2015): Unkonventionelle Geldpolitik - kein Paradigmenwechsel, Perspektiven der Wirtschaftspolitik, 16, 2, 127–150.  Google Scholar
  67. Krugman, P. R. (2018): Good Enough for Government Work? Macroeconomics Since the Crisis, Oxford Review of Economic Policy, 34, 1–2, 156–168.  Google Scholar
  68. Lagos, F./Reuben, E. (2016): Macroeconomic Experiments, in: Branas-Garza, P./Cabrales, A., eds.: Experimental Economics, Vol. II: Economic Applications, London, 149–165.  Google Scholar
  69. Leeper, E. M. (1991): Equilibria Under ‘Active’ and ‘Passive’ Monetary and Fiscal Policies, Journal of Monetary Economics, 27, 1, 129–147.  Google Scholar
  70. Leeper, E. M./Leith, C. (2017): Understanding Inflation as a Joint Monetary-Fiscal Phenomenon, in: Taylor, J. B./Uhlig, H., eds.: Handbook of Macroeconomics, North Holland, Vol. 2B, Ch. 31, 2305–2415.  Google Scholar
  71. McCallum, B. T. (2009): Inflation Determination with Taylor Rules - Is New-Keynesian Analysis Critically Flawed? Journal of Monetary Economics, 56, 8, 1101–1108.  Google Scholar
  72. Sargent, T. J./Wallace, N. (1981): Some Unpleasant Monetarist Arithmetic, Federal Reserve Bank of Minneapolis, Quarterly Review, 1–17.  Google Scholar
  73. Spahn, P. (2017): Zentralbankdesign in der Währungsunion – Monetäre Absicherung der Staatsschulden? List Forum für Wirtschafts- und Finanzpolitik, 43, 3, 295–319.  Google Scholar
  74. Spahn, P. (2018): Unconventional Views on Inflation Control - Forward Guidance, the Neo-Fisherian Approach, and the Fiscal Theory of the Price Level, Hohenheim Discussion Papers in Business, Economics and Social Sciences, 2.  Google Scholar
  75. Uribe, M. (2017): The Neo-Fisher Effect in the United States and Japan, NBER Working Papers, 23977, Cambridge.  Google Scholar
  76. Williamson, S. (2016): Neo-Fisherism - A Radical Idea, or the Most Obvious Solution to the Low-Inflation Problem? Federal Reserve Bank of St. Louis, The Regional Economist, July, 5–9.  Google Scholar
  77. Woodford, M. (1988): Monetary Policy and Price Level Indeterminacy in a Cash-in-advance Economy, University of Chicago (published in: Economic Theory, 4, 3, 1994, 345–80).  Google Scholar
  78. Woodford, M. (1995): Price-Level Determinacy Without Control of a Monetary Aggregate, Carne­gie-Rochester Conference Series on Public Policy, 43, 3, 1–46.  Google Scholar
  79. Woodford, M. (2003): Interest and Prices - Foundations of a Theory of Monetary Policy, Princeton.  Google Scholar
  80. Woodford, M. (2018): Monetary Policy Analysis When Planning Horizons Are Finite, CEPR Discussion Paper 12968, London.  Google Scholar

Abstract

Whereas in former times, the ‘Chicago View’ in monetary policy stood for the Quantity Theory and money supply control, it is now the centre of unconventional approaches in macro theory. The Neo-Fisherian proposal suggests, in the case of low inflation and nominal interest rates pegged to the zero-lower bound, to increase policy rates immediately to the long-run equilibrium value that corresponds to the ‘natural’ real interest rate and the inflation target. The Fiscal Theory of the Price Level believes that goods prices jump to a level that validates the long-run sustainability condition of government debt even if central banks abstain from monetising. Both views are criticized for analytical and empirical reasons.

Table of Contents

Section Title Page Action Price
Peter Spahn: New Chicago Views on Inflation Control: The Neo-Fisherian Approach and the Fiscal Theory of the Price Level 1
Abstract 1
Zusammenfassung 1
I. Introduction 2
II. Forward Guidance Under Dispute 3
III. The Neo-Fisherian View 5
1. Turning Arbitrage Upside Down: The New Keynesian Model as Bubble Economics? 5
2. Raising Inflation Through Higher Interest Rates? 9
IV. Misreading Intertemporal Equilibrium Conditions: The Fiscal Theory of the Price Level 1
V. Closing Remarks 1
References 1

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