The Neo-Fisher Hypothesis

John Cochrane and Stephen Williamson have been blogging about a pretty radical idea for monetary policy at the zero lower bound (ZLB). They suggest that in order to increase inflation the Federal Reserve should raise its target interest rate and the rate it pays on reserves. The mechanism by which this would lead to higher inflation is not particularly well articulated (understood?) but is based on the long-run super-neutrality condition known as the Fisher relation. In the long run nominal interest rates and inflation must move proportionally to maintain the constant long-run equilibrium real rate of interest. Over the next few posts I intend to examine this idea empirically using some simple techniques.