The neo-Fisherian effect in a new Keynesian model with real money balances

This study explores how the real money balance effect (RMBE) affects the neo-Fisherian effect (NFE) in a standard new Keynesian model. First, we find that the presence of the RMBE can partly explain the occurrence of the NFE, and that increasing the nonseparability parameter magnifies the positive response of the nominal interest rate to a persistent inflation target shock. Second, we show that the degree of nominal price stickiness is important in explaining how the RMBE amplifies the NFE. In sum, this study addresses how the presence of the RMBE facilitates generating the NFE.