The Sustainability of the Interest-Rate Path: Answering John Cochrane from Within His Own Framework
John Cochrane poses a deep and honest question in “ Reasons to Lower Rates .” In his best models—featuring long-term debt, a generalized Phillips curve, long-run neutrality, and long-run stability—a persistent reduction in interest rates, once the maturity structure of the debt has been shortened, can lower inflation in both the short and the long run. The channel is dual: the long-run Fisherian mechanism and, crucially, the lower interest burden on the outstanding stock of debt, which eases fiscal pressure. Cochrane acknowledges the result but wonders whether he truly believes it enough to defend it in public. He asks whether he should show more courage, as Milton Friedman did in his celebrated presidential address to the American Economic Association.¹ In the immediate follow-up, “ More on lower rates ,” Cochrane deepens the same logic and offers a second route to “immaculate” disinflation: announce the lower interest-rate path far enough in advance. The short-run contrary movement t...
