Must-read: David Glasner (2015): “Neo-Fisherism and All That”

Must-Read: David Glasner (2015): Neo-Fisherism and All That: “John Cochrane and Stephen Williamson [believe]… if the central bank wants 2% inflation… [and] if the Fisherian real rate is 2%…

…the central bank should set its interest-rate instrument (Fed Funds rate) at 4%, because, in equilibrium–and, under rational expectations, that is the only policy-relevant solution of the model–inflation expectations must satisfy the Fisher equation. The Neo-Fisherians believe… they have overturned at least two centuries of standard monetary theory… back… to Henry Thornton…. The way to reduce inflation is for the monetary authority to reduce the setting on its interest-rate instrument and the way to counter deflation is to raise the setting on the instrument…. Unwilling to junk more than 200 years of received doctrine on the basis, not of a behavioral relationship, but a reduced-form equilibrium condition containing no information about the direction of causality, few monetary economists and no policy makers have become devotees of the Neo-Fisherian Revolution….

Let Cochrane read Nick Rowe…. If he did, he might realize that if you do no more than compare alternative steady-state equilibria, ignoring the path leading from one equilibrium to the other, you miss just about everything that makes macroeconomics worth studying…. The very notion that you don’t have to worry about the path by which you get from one equilibrium to another is so bizarre that it would be merely laughable if it were not so dangerous…