Interest and inflation rates through the lens of the theory of Irving Fisher
Date
17/09/2015
Magnus Jonsson and André Reslow analyse the risks of a central bank’s policy rate remaining low over a long period of time.
The analysis is based on Irving Fisher's theory, which posits that the nominal interest rate should be equal to the sum of the expected inflation rate and the real interest rate. The authors also assume that monetary policy is neutral in the long run – i.e. it does not influence the long run development of real economic variables. Using an economic model and empirical estimates with data from several countries, the idea that a low policy rate over a long period of time can lead to low inflation is supported.
The article is included in this year's second issue of the Sveriges Riksbank Economic Review , which has been published today.
Magnus Jonsson and André Reslow
The authors work in the Monetary Policy Department at the Riksbank.
