It took me a while to convince myself to write about “neo-fisherism” as a solution to low trend inflation.
The motivation behind neo-fisherism is relatively intuitive – we have observed nominal interest rates and inflation move together, and require an explanation that supports that stylised fact. Furthermore, the idea behind neo-fisherism is that there is the Fisher effect describes how inflation expectations must move when nominal interest rate goes changes – allowing us to keep our assumption of “neutrality” in the long run with a fixed real interest rate, rather than relying on changes in the neutral real rate of interest.
However, at face value this completely contradicts the conventional monetary policy set up, where we were taught that inflation rate and nominal interest rate follow the Taylor principle, so that when you cut the nominal interest rate, then inflation (and inflation expectations) goes up. Given this way of thinking, and the empirical regularity that inflation and nominal interest rates DO move together, does this overturn conventional monetary economics?