Typical Neo-Wicksellian analysis takes the natural interest rate as given and suggests that setting the nominal interest rate below the given natural rate will result in a boom while doing the opposite will result in a recession. There is nothing fundamentally wrong with the analysis, except that it seems to suggest that lower nominal interest rates always imply looser monetary policy.

This is not a flaw of the Neo-Wicksellian framework, but rather the assumption of a natural rate that is exogenous to central banks. There are, in reality, two ways that a central bank can ease monetary policy in a Neo-Wicksellian model: it lower the nominal interest rate and it can raise the natural rate. Monetary expansions that result in higher interest rates do not confound Neo-Wicksellian analysis, they simply confound the notion of an exogenous natural rate.

If, for instance, a central bank credibly adopts a higher inflation target, it is only natural that output, inflation, and the nominal interest rate should rise almost immediately. This is because the credible increase in the inflation target resulted in a corresponding increase in inflation expectations, which raises the natural rate. So long at the central bank fails to fully offset the increase in the natural rate that it caused, there will be a boom in output as well as an increase in inflation.

Neo-Fisherism is also Neo-Wicksellian, it simply abstracts from the credible increase in inflation expectations and assumes that they occur whenever the nominal interest rate is increased. In a Neo-Fisherian world, the natural rate moves with the nominal interest rate instead of being given exogenously.

In sum, a proper Neo-Wicksellian framework suggests two policy tools are available a central bank; the nominal interest rate and the Wicksellian natural rate. A central bank may very well increase the natural rate in normal times (i.e., times when there is not a liqudity trap) instead of reducing the nominal interest rate, which explains how a rising nominal interest rate might be consistent with loose monetary policy and how a low rate might mean tight policy.

This is not a flaw of the Neo-Wicksellian framework, but rather the assumption of a natural rate that is exogenous to central banks. There are, in reality, two ways that a central bank can ease monetary policy in a Neo-Wicksellian model: it lower the nominal interest rate and it can raise the natural rate. Monetary expansions that result in higher interest rates do not confound Neo-Wicksellian analysis, they simply confound the notion of an exogenous natural rate.

If, for instance, a central bank credibly adopts a higher inflation target, it is only natural that output, inflation, and the nominal interest rate should rise almost immediately. This is because the credible increase in the inflation target resulted in a corresponding increase in inflation expectations, which raises the natural rate. So long at the central bank fails to fully offset the increase in the natural rate that it caused, there will be a boom in output as well as an increase in inflation.

Neo-Fisherism is also Neo-Wicksellian, it simply abstracts from the credible increase in inflation expectations and assumes that they occur whenever the nominal interest rate is increased. In a Neo-Fisherian world, the natural rate moves with the nominal interest rate instead of being given exogenously.

In sum, a proper Neo-Wicksellian framework suggests two policy tools are available a central bank; the nominal interest rate and the Wicksellian natural rate. A central bank may very well increase the natural rate in normal times (i.e., times when there is not a liqudity trap) instead of reducing the nominal interest rate, which explains how a rising nominal interest rate might be consistent with loose monetary policy and how a low rate might mean tight policy.

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