This paper assesses the presence and importance of the neo-Fisher effect in postwar data. It formulates and estimates an empirical and a New Keynesian model driven by stationary and nonstationary monetary and real shocks. In accordance with conventional wisdom, temporary increases in the nominal interest rate are estimated to cause decreases in inflation and output. The main finding of the paper is that permanent monetary shocks that increase the nominal interest rate and inflation in the long run cause increases in interest rates, inflation, and output in the short run and explain about 45 percent of inflation changes. (JEL E12, E23, E31, E43, E52)
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