On Modeling the Effects of Inflation Shocks: Comments and Some Further Evidence

Fair (2002) argues that New Keynesian models are wrong in predicting that an inflation shock has contractionary effects only if it raises the real interest rate, and that a coefficient on inflation higher than one in the Taylor rule is a necessary condition for stability. While Fair uses his macroeconometric model as a benchmark to evaluate the predictions of the standard New Keynesian framework, we adopt a VAR supported by models in that framework, and the model of Rudebusch and Svensson (1999). The findings are broadly in line with Fair's.