New-Fisherian Transmission of a Monetary Policy Shock: a Swedish analysis

Abstract

In the aftermath of the Great Recession, central banks had to deal with stubborn low inflation. Therefore, as suggested by the mainstream literature, represented by the Taylor rule, they have reduced nominal interest rate until the Zero Lower Bound (ZLB). However, inflation remained low and stable. Then, monetary authorities turned to unconventional monetary policy, such as Forward Guidance; in spite of this, inflation is still below the target. In this framework, New-Fisherities state that inflation is low because of low nominal interest rates rather than despite of these; they sustain that almost zero nominal interest rate can pin down inflation. This research proves that, when the monetary policy shock is permanent, nominal interest rates and inflation follow the same path. Furthermore, the Swedish data evidences that after 2008 it is more likely to have a co-movement between interest rates and inflation, since, in this period, the estimated permanence of the shock is higher than before the crisis.