price inflation and nominal interest rates

Carleton University economist Nick Rowe examines the question “What effect on inflation does a Central Bank’s announcement of an increase (or decrease) in nominal interest rates have?” His answer, not unusual for an economist, is: “It depends”.

I have been arguing with John Cochrane and Steve Williamson over whether central banks announcing higher nominal interest rates is inflationary or deflationary. The very fact that economists are arguing about that very basic question tells us something important about central banks’ using nominal interest rates as a communications strategy: it sucks. This is a point that economists like Scott Sumner and I have been making for some time. Do low nominal interest rates mean monetary policy is loose or tight? It depends.

Nick Rowe, “Nominal interest rates, inflation, and central banks’ communications strategy“, Worthwhile Canadian Initiative, 22 December 2013.

I was pleased to see Nick include a 2 x 2 chart to illustrate the possibilities. Long ago, when I was a graduate student, Gilles Paquet taught me the usefulness of this simple device. Gilles at the time chaired Carleton’s economics department. He was a superb chairman, and soon became Dean of the Faculty of Arts and Science

 

 

 

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One Response to “price inflation and nominal interest rates”

  1. “Akshay”, commenting on Nick’s post, wrote:

    I’m not an economist but two things in this post caught my eye: “it depends” and “we do not know what they mean”. When non-economists listen in on conversations between academic economists, two of the most common reactions are: “surely, it depends” and “we do not know what they mean”.