<p>The theory is called Neo-Fisherishm. The <a href="https://en.wikipedia.org/wiki/Real_interest_rate#Fisher_equation" rel="noreferrer">Fisher equation</a> states
<span class="math-container">$$r \approx i - \pi_e,$$</span></p>
<p>where <span class="math-container">$r$</span> is the real interest rate, <span class="math-container">$i$</span> the nominal, and <span class="math-container">$\pi_e$</span> the expected inflation rate.</p>
<p>Primary determinants of long-term equilibrium real rates are mostly non-monetary: potential growth rates; demographics; risk preferences in portfolios.</p>
<blockquote>
<p>Real rates <span class="math-container">$r$</span> are determined by fundamentals: increasing <span class="math-container">$i$</span> =&gt; Higher inflation</p>
</blockquote>
<p>There are a lot of nuances and details for this to &quot;hold&quot;. However, the same is true for</p>
<blockquote>
<p>Lower interest rate =&gt; Loaning money is cheaper =&gt; More money in the
system =&gt; Higher inflation</p>
</blockquote>

CC BY-SA 4.0
2022-01-08T08:37:27.063Z
Thanks, still digesting but it seems like this is what I was looking for.
Dennis Jaheruddin
CC BY-SA 4.0
2022-01-08T08:47:32.177Z
And I acknowledge there are serious assumptions behind each theory, but at least now I know what theories there are.
Dennis Jaheruddin
CC BY-SA 4.0
2022-01-01T22:41:47.657Z
2022-01-01T23:36:57.263Z
2022-01-01T23:36:57.263Z
AKdemy
<p>I always was taught that inflation is impacted by interest <a href="https://economics.stackexchange.com/a/8483/19756">like so</a>:</p>
<blockquote>
<p>Lower interest rate =&gt; Loaning money is cheaper =&gt; More money in the
system =&gt; Higher inflation</p>
</blockquote>
<p>However recently I am also hearing opposite theories as to how lower interest rate can lead to lower inflation.</p>
<p>I found some discussions and explanations but all of them stretch several paragraphs. Is there a short and easy to follow logic like the one I just quoted that can explain this directional impact?</p>
<hr />
<p>I won’t prevent people from adding context or evaluation as to when each direction is relevant, but please make sure this is clearly separated from the actual impact explanation.</p>

CC BY-SA 4.0
2022-01-01T14:13:25.030Z
Can you please add sources for the statement that lower interest rate can lead to lower inflation? Where did you hear such theories. 1. Prima facie the statement seems absurd and contradicts general evidence. 2. I suppose there could be some special rare situation where there are some complex  and weird expectational effects but then it would be important to see the details of the argument to evaluate it, taken at face value the statement is absurd
1muflon1
CC BY-SA 4.0
2022-01-01T20:39:55.243Z
It's Neo-Fisherism: Stephen D. Williamson has a simple article explaining the basics. It's mainly about causation. From the nominal interest rate to inflation (Neo-Fisherism) or the other way around ("conventional" view). Primary determinants of long-term equilibrium real rates are mostly non-monetary: potential growth rates; demographics; risk preferences in portfolios. Now look at the [Fisher equation](https://en.wikipedia.org/wiki/Real_interest_rate#Fisher_equation): r = i - pi. If real rates r are determined by fundamentals, increasing i can only be causing inflation to increase as well.
AKdemy
CC BY-SA 4.0
2022-01-01T20:45:50.183Z
https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem It is discussed quite frequently with aggregate supply as defined by J. Galí: Monetary policy, inflation, and the business cycle: An introduction to the new Keynesian framework, Princeton 2008, Princeton University Press. or P. De Grauwe: The scientific foundation of dynamic stochastic general equilibrium (DSGE) models.
AKdemy
CC BY-SA 4.0
2022-01-01T20:49:14.673Z
You can read J. Cochrane: Monetary policy with interest on reserves, in: Journal of Economic Dynamics and Control, Vol. 49, 2014, pp. 74-108; J. Cochrane: Whither Inflation?, 31 August 2015, The Grumpy Economist; S. Schmidt-Grohé, M. Uribe: The making of a great contraction with a liquidity trap and a jobless recovery, NBER Working Paper No. 18544, 2012. to get a more thorough discussion of the Neo-Fisherian theory.
AKdemy
CC BY-SA 4.0
2022-01-01T20:58:05.030Z
Stephanie Schmitt-Grohe has some papers like the ECB conference on monetary policy on her website (http://www.columbia.edu/~ss3501/research/schmittgrohe.html). That particular conference also references her work with Uribe. Ultimately, I think you read some already and all you wanted is a simply "one-liner" logic, which is the fisher equation from above (with reverse causation of i and inf). It is not mainstream, yet discussed frequently among all major central banks (FED,BOE, ECB...). It is mainly relevant for liquidity traps (zero lower bounds) in combination with low inflation expectations.
AKdemy
CC BY-SA 4.0
2022-01-01T20:59:31.537Z
@AKdemy if you are trying to provide an answer please post it as an answer so it can be upvoted/accepted
1muflon1
CC BY-SA 4.0
2022-01-01T21:06:37.950Z
My answer(s) on monetary theory are not well received it seems so I thought I rather leave it with a few comments.
AKdemy
CC BY-SA 4.0
2022-01-01T21:13:42.783Z
@AKdemy just because one of your answer was badly received is no reason not to post another. That would be an equivalent of never sending paper to a journal just because 1 submission got rejected by referees. Also comments are not really for answer if they get cluttered they will have to be cleared. I wont force you to post it as an answer but you should do so. Personally I would likely upvote it because it looks to answer the question
1muflon1
CC BY-SA 4.0
2022-01-01T22:45:55.710Z
Look, I think any journal publishing work on monetary theory would agree that interest rate policy is not directly connected to money supply (not even high powered money). Moreover, broader aggregates (the ones that were discussed) didn't really react at all, despite the unprecedented increase in monetary base. I provided plenty of references. Now claiming raising rates increases inflation is a lot more controversial in my opinion, especially because it was already claimed the statement is absurd. The only comment that matters for the question is the first. The rest are to add sources.
AKdemy
CC BY-SA 4.0
2022-01-01T22:57:37.937Z
@AKdemy the question just asks for explanation of the argument not whether there actually is positive relationship between nominal interest rate and inflation. Modern Monetary Theory is extremely controversial but one can ask about views of MMT theorists on this site, and people can provide an answer
1muflon1
<inflation><interest-rate>
Simple description of how interest impacts inflation
Dennis Jaheruddin
# Simple description of how interest impacts inflation

(Asked by: username_0 on 2022-01-01)

I always was taught that inflation is impacted by interest [like so](https://economics.stackexchange.com/a/8483/19756):

> Lower interest rate => Loaning money is cheaper => More money in the
> system => Higher inflation

However recently I am also hearing opposite theories as to how lower interest rate can lead to lower inflation.

I found some discussions and explanations but all of them stretch several paragraphs. Is there a short and easy to follow logic like the one I just quoted that can explain this directional impact?

---

I won’t prevent people from adding context or evaluation as to when each direction is relevant, but please make sure this is clearly separated from the actual impact explanation.

**Tags:** inflation, interest-rate

> **Comments:**
> **username_1**: Can you please add sources for the statement that lower interest rate can lead to lower inflation? Where did you hear such theories. 1. Prima facie the statement seems absurd and contradicts general evidence. 2. I suppose there could be some special rare situation where there are some complex  and weird expectational effects but then it would be important to see the details of the argument to evaluate it, taken at face value the statement is absurd  
> **username_2**: It's Neo-Fisherism: Stephen D. Williamson has a simple article explaining the basics. It's mainly about causation. From the nominal interest rate to inflation (Neo-Fisherism) or the other way around ("conventional" view). Primary determinants of long-term equilibrium real rates are mostly non-monetary: potential growth rates; demographics; risk preferences in portfolios. Now look at the [Fisher equation](https://en.wikipedia.org/wiki/Real_interest_rate#Fisher_equation): r = i - pi. If real rates r are determined by fundamentals, increasing i can only be causing inflation to increase as well.  
> **username_2**: https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem It is discussed quite frequently with aggregate supply as defined by J. Galí: Monetary policy, inflation, and the business cycle: An introduction to the new Keynesian framework, Princeton 2008, Princeton University Press. or P. De Grauwe: The scientific foundation of dynamic stochastic general equilibrium (DSGE) models.  
> **username_2**: You can read J. Cochrane: Monetary policy with interest on reserves, in: Journal of Economic Dynamics and Control, Vol. 49, 2014, pp. 74-108; J. Cochrane: Whither Inflation?, 31 August 2015, The Grumpy Economist; S. Schmidt-Grohé, M. Uribe: The making of a great contraction with a liquidity trap and a jobless recovery, NBER Working Paper No. 18544, 2012. to get a more thorough discussion of the Neo-Fisherian theory.  
> **username_2**: Stephanie Schmitt-Grohe has some papers like the ECB conference on monetary policy on her website (http://www.columbia.edu/~ss3501/research/schmittgrohe.html). That particular conference also references her work with Uribe. Ultimately, I think you read some already and all you wanted is a simply "one-liner" logic, which is the fisher equation from above (with reverse causation of i and inf). It is not mainstream, yet discussed frequently among all major central banks (FED,BOE, ECB...). It is mainly relevant for liquidity traps (zero lower bounds) in combination with low inflation expectations.  
> **username_1**: @username_2 if you are trying to provide an answer please post it as an answer so it can be upvoted/accepted  
> **username_2**: My answer(s) on monetary theory are not well received it seems so I thought I rather leave it with a few comments.  
> **username_1**: @username_2 just because one of your answer was badly received is no reason not to post another. That would be an equivalent of never sending paper to a journal just because 1 submission got rejected by referees. Also comments are not really for answer if they get cluttered they will have to be cleared. I wont force you to post it as an answer but you should do so. Personally I would likely upvote it because it looks to answer the question  
> **username_2**: Look, I think any journal publishing work on monetary theory would agree that interest rate policy is not directly connected to money supply (not even high powered money). Moreover, broader aggregates (the ones that were discussed) didn't really react at all, despite the unprecedented increase in monetary base. I provided plenty of references. Now claiming raising rates increases inflation is a lot more controversial in my opinion, especially because it was already claimed the statement is absurd. The only comment that matters for the question is the first. The rest are to add sources.  
> **username_1**: @username_2 the question just asks for explanation of the argument not whether there actually is positive relationship between nominal interest rate and inflation. Modern Monetary Theory is extremely controversial but one can ask about views of MMT theorists on this site, and people can provide an answer  

---

## 1 answers

### Answer by username_2 on 2022-01-01. Score: 6 | Accepted answer

The theory is called Neo-Fisherishm. The [Fisher equation](https://en.wikipedia.org/wiki/Real_interest_rate#Fisher_equation) states
$$r \approx i - \pi\_e,$$

where $r$ is the real interest rate, $i$ the nominal, and $\pi\_e$ the expected inflation rate.

Primary determinants of long-term equilibrium real rates are mostly non-monetary: potential growth rates; demographics; risk preferences in portfolios.

> Real rates $r$ are determined by fundamentals: increasing $i$ => Higher inflation

There are a lot of nuances and details for this to "hold". However, the same is true for

> Lower interest rate => Loaning money is cheaper => More money in the
> system => Higher inflation

> **Comments:**
> **username_0**: Thanks, still digesting but it seems like this is what I was looking for.  
> **username_0**: And I acknowledge there are serious assumptions behind each theory, but at least now I know what theories there are.  

---

