Interest Rates Rigidities and the Fisher Equation

The literature on nominal interest rates rigidity does not fully address its macroeconomic implications. How nominal interest rates rigidity would interact with the Fisher equation is simple, yet the implications are surprising. If nominal rates cannot catch up to real rates, the Fisher effect becomes inverted in the short term: big enough credit crunches bring deflation and central banks must lower interest rates to stimulate inflation. The paper shows that nominal interest rates rigidity is sufficient to characterize the little we know about inflation. It also shows that, unlike for other products, the pricing of loans is influenced by past negotiated loans, generating rigidity.