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The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution

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  • Woon Gyu Choi

    (International Monetary Fund)

Abstract

This paper examines the implications of inflation persistence for the inverted Fisher hypothesis that nominal interest rates do not adjust to inflation because of a high degree of substitutability between money and bonds. It is emphasized that the substitutability between nominal assets and capital renders the hypothesis inconsistent with the data when inflation persistence is high. Using a switching regression model, the analysis allows the reflection of inflation in interest rates to vary according to the degree of inflation persistence or forecastability. The hypothesis is supported by U.S. data only when inflation forecastability is below a certain threshold. Copyright 2002, International Monetary Fund

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 49 (2002)
Issue (Month): 2 ()
Pages: 4

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Handle: RePEc:pal:imfstp:v:49:y:2002:i:2:p:4

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Cited by:
  1. John W. Galbraith & Greg Tkacz, 2007. "How Far Can Forecasting Models Forecast? Forecast Content Horizons for Some Important Macroeconomic Variables," Working Papers, Bank of Canada 07-1, Bank of Canada.
  2. Woon Gyu Choi & Yi Wen, 2010. "Dissecting Taylor Rules in a Structural VAR," IMF Working Papers, International Monetary Fund 10/20, International Monetary Fund.

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