His New Monetarist theory has been that in order to raise inflation we actually need to raise the nominal interest rates-as counterintutitive as that sounds.
http://newmonetarism.blogspot.com/2015/02/taylor-rules-zero-lower-bound-inflation.html
His reasoning is that in the short term nominal rates may raise inflation but in the long term they have the opposite effect.
"If I think about policy in terms of pegging a short-term nominal interest rate, I understand that, if the nominal interest rate goes down, and stays there, that the short run effect is more inflation (that’s the liquidity effect at work), but in the long run the Fisher effect takes over, and inflation actually goes down. Again, the liquidity effect ultimately dissipates. So, suppose we have been at the ZLB for a long time. The liquidity effect has dissipated, and the inflation rate is too low. How do I get the inflation rate up? I certainly can’t rely on a short-run liquidity effect, as the nominal interest rate can’t go down. There’s nowhere to go but up, and to rely on the long-run Fisher effect to take over ultimately. Of course, you may have to bear the effects of even lower inflation in the short run because of the liquidity effect."
http://diaryofarepublicanhater.blogspot.com/2015/02/its-all-about-taylor-rule-and-zlb.html
What's happening on Wall Street right now according to an article at CNBC is pretty counterintuitive as well. Allegedly the Street is frustrated with the Fed for not raising rates quickly enough.
"Over the past three months, businesses have added more than 1 million jobs, according to upwardly revised numbers from the Bureau of Labor Statistics. Though still anemic by historical standards—growth was close to 4 percent the last time the unemployment rate was this low, in mid-2008—wages rose month over month at a faster pace than anytime during the post-financial crisis recovery.
"While the numbers generated mostly applause on Wall Street, they also raised another question: When will the Federal Reserve stop acting like the economy is in crisis?"
http://newmonetarism.blogspot.com/2015/02/taylor-rules-zero-lower-bound-inflation.html
His reasoning is that in the short term nominal rates may raise inflation but in the long term they have the opposite effect.
"If I think about policy in terms of pegging a short-term nominal interest rate, I understand that, if the nominal interest rate goes down, and stays there, that the short run effect is more inflation (that’s the liquidity effect at work), but in the long run the Fisher effect takes over, and inflation actually goes down. Again, the liquidity effect ultimately dissipates. So, suppose we have been at the ZLB for a long time. The liquidity effect has dissipated, and the inflation rate is too low. How do I get the inflation rate up? I certainly can’t rely on a short-run liquidity effect, as the nominal interest rate can’t go down. There’s nowhere to go but up, and to rely on the long-run Fisher effect to take over ultimately. Of course, you may have to bear the effects of even lower inflation in the short run because of the liquidity effect."
http://diaryofarepublicanhater.blogspot.com/2015/02/its-all-about-taylor-rule-and-zlb.html
What's happening on Wall Street right now according to an article at CNBC is pretty counterintuitive as well. Allegedly the Street is frustrated with the Fed for not raising rates quickly enough.
"Over the past three months, businesses have added more than 1 million jobs, according to upwardly revised numbers from the Bureau of Labor Statistics. Though still anemic by historical standards—growth was close to 4 percent the last time the unemployment rate was this low, in mid-2008—wages rose month over month at a faster pace than anytime during the post-financial crisis recovery.
"While the numbers generated mostly applause on Wall Street, they also raised another question: When will the Federal Reserve stop acting like the economy is in crisis?"
"The central bank has been holding its short-term interest rate target near zero for more than six years, with expectations that it will begin hiking rates, incrementally, later in the year."
http://www.cnbc.com/id/102404851
Note the Fed isn't using SW New Monetarist logic that raising rates is necessary to raise inflation just that if the economy is on the upswing why is the Fed so reticent to raise rates?
I think overall the Fed has good reason to be slow to do so and that SW's argument is somehow mixing up cause and effect. I don't think that raising nominal rates will raise inflation but rather that rising inflation will raise rates.
However, SW may well get his chance at a natural experiment this year after the Fed raises rates. Though even then you'd still get an argument over causation. That's the beauty of economics! You seldom get natural experiments in economics but even after you do there's lots of room for interpretation.
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