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Structural Breaks, Inflation and Interest Rates: Evidence from the G7 Countries

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  • Jesús Clemente

    (Department of Economic Analysis, University of Zaragoza, Gran Vía 2, 50006 Zaragoza, Spain)

  • María Dolores Gadea

    (Department of Applied Economics, University of Zaragoza, Gran Vía 2, 50006 Zaragoza, Spain)

  • Antonio Montañés

    (Department of Economic Analysis, University of Zaragoza, Gran Vía 2, 50006 Zaragoza, Spain)

  • Marcelo Reyes

    (Department of Economic Analysis, University of Zaragoza, Gran Vía 2, 50006 Zaragoza, Spain)

Abstract

This study reconsiders the common unit root/co-integration approach to test for the Fisher effect for the economies of the G7 countries. We first show that nominal interest and inflation rates are better represented as I(0) variables. Later, we use the Bai–Perron procedure to show the existence of structural changes in the Fisher equation. After considering these breaks, we find very limited evidence of a total Fisher effect as the transmission coefficient of the expected inflation rates to nominal interest rates is very different than one.

Suggested Citation

  • Jesús Clemente & María Dolores Gadea & Antonio Montañés & Marcelo Reyes, 2017. "Structural Breaks, Inflation and Interest Rates: Evidence from the G7 Countries," Econometrics, MDPI, vol. 5(1), pages 1-17, February.
    • Handle: RePEc:gam:jecnmx:v:5:y:2017:i:1:p:11-:d:90640
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    2. Shahbaz, Muhammad & Zakaria, Muhammad & Shahzad, Syed Jawad Hussain & Mahalik, Mantu Kumar, 2018. "The energy consumption and economic growth nexus in top ten energy-consuming countries: Fresh evidence from using the quantile-on-quantile approach," Energy Economics, Elsevier, vol. 71(C), pages 282-301.
    3. Maghyereh, A. & Al-Zoubi, H., 2006. "Does Fisher Effect Apply in Developing Countries: Evidence From a Nonlinear Cotrending Test applied to Argentina, Brazil, Malysia, Mexico, Korea and Turkey," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(2).
    4. Inês da Cunha Cabral & João Nicolau, 2022. "Inflation in the G7 and the expected time to reach the reference rate: A nonparametric approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1608-1620, April.
    5. Marilena Furno, 2021. "Cointegration tests at the quantiles," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1087-1100, January.
    6. İsmet Göçer & Serdar Ongan, 2020. "Asymmetric Impacts of Inflation on the US Bond Rates and FED’s Pre-Emptive Policy," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 5(2), pages 143-157, December.
    7. John D. Levendis, 2018. "Time Series Econometrics," Springer Texts in Business and Economics, Springer, number 978-3-319-98282-3, August.
    8. Emanuele Russo & Neil Foster-McGregor, 2022. "Characterizing growth instability: new evidence on unit roots and structural breaks in countries’ long run trajectories," Journal of Evolutionary Economics, Springer, vol. 32(2), pages 713-756, April.

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    More about this item

    Keywords

    unit roots; structural breaks; interest rates; inflation; Fisher effect;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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