Macroeconomists need to pay more attention to finance sociology. Choke.
Languages have multiple equilibria. If we all used the word "cat" to mean dog, then "cat" would mean dog. And if I walked into a pet store and said "I want to buy a cat", the people in the pet store would react differently to how they react today. They would bring me a dog, not a cat.
The effect of my action depends, in part, on how people interpret that action. What does it mean? Why did Nick say/do that?
Suppose the Bank of Canada targets 2% inflation, using a nominal interest rate instrument. Suppose the economy is humming along in full rational expectations equilibrium, with inflation at 2%, nominal interest rate at 3%, and nobody expects it to change.
Now suppose the Bank of Canada suddenly and unexpectedly raises the interest rate to 4%. But the memo explaining why it did that gets lost. How would people react to the Bank of Canada's action?
The initial reaction would be: "WTF!?"
Both the "!" and the "?" are important. It's a surprise, and they don't know what it means. They don't know why the Bank of Canada did it. And the effect the Bank of Canada's action will have on the economy depends very much on how people interpret that action. On what they decide it means. On what they decide about why the Bank of Canada did it. It's a signal, of something, but what is it a signal of? Monetary policy is a signalling equilibrium.
This is not a mechanical question. The monetary "transmission mechanism" is very different from a car's transmission. It isn't all about concrete steppes.
Eventually the Bank of Canada's memo gets published on the web. Here are four possible memos explaining why the Bank did what it did:
1) "Our new information/model shows demand is going to be much stronger than our old information/model says it was, and we need to raise real interest rates to prevent inflation rising above the 2% target."
2) "We decided to increase the inflation target from 2% to 3%, figured expected inflation would rise very quickly to the new target, and didn't want real interest rates to drop."
3) "We've turned Swedish, and decided to raise the overnight rate to reduce asset prices, even if it means inflation drops below the 2% target temporarily."
4) "The person responsible has been fired, and normal monetary policy will resume shortly."
We are not going to get the same response across all 4 cases.
[Yes I'm guilty of self-plagiarism. Re-cycle, re-use. If it were only this easy to get a downstream O2 sensor off a junked Tercel at Kenny U-pull.]
In Canada today, memo 1 is most plausible, but we can't rule out memo 3 (or even memo 4). Memo 2 would almost certainly be posted well before the Bank raised the nominal interest rate.
Neo-Fisherians (who say raising the nominal interest rate will cause inflation to increase) are implicitly assuming memo 2. Or rather, they don't mention memos at all, but are implicitly assuming that people will interpret the Bank of Canada's action in line with memo 2.
What happens if memo 2 is in fact published on the web, but some people don't get the memo, and assume it must have been memo 1 that got published, like normal? And the people who did get the memo know that some fraction of the population won't have got the memo, and will assume it's memo 1 that got posted? The people who didn't get the memo are going to cut their own spending (figuring someone else will spend more to make up for it and keep inflation on target). The people who did get the memo are going to figure out that the people who didn't get the memo are going to cut their spending, and that nobody else will make up for it, so that demand will drop, and so output and inflation will drop.
We can't get the Neo-Fisherian result unless everyone gets the memo, and interprets the Bank of Canada's action the same way. Ain't gonna happen. You can't change languages instantly like that. Some people will still think that "cat" means cat, until they eventually learn the language has changed by watching what other people do.
But if the Bank of Canada issued memo 2, and at the same time raised the nominal interest rate by less than the announced increase in the inflation target, to make up for the fact that not everyone will get the memo initially, and then resumed normal play of issuing memos like memo 1, depending on the speed at which the slower people got the memo (which will look like following the Howitt/Taylor principle), then something like that would work.
[Damn I'm spending too much time on this N-F topic.]