How NF works · UE University

How NF works

Neo-Fisherism works because the long-run real interest rate is set by real forces (thrift, productivity, demographics) rather than by the central bank, so a credible permanent rise in the policy rate can be consistent with equilibrium only if expected—and therefore actual—inflation rises one-for-one via the Fisher equation (i = r + \pi^e). In everyday terms, the central bank is promising savers a permanently richer stream of dollars; since the economy cannot actually deliver a higher real return, those extra dollars must lose purchasing power faster through higher inflation.

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How NF works