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Taylor Principle Supplements the Fisher Effect: Empirical Investigation under the US Context

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  • Mohammed Saiful ISLAM

    ()
    (Department of Economics, University of Chittagong)

  • Mohammad Hasmat ALI

    (Department of Finance and Banking, University of Chittagong)

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    Abstract

    This paper reviews the short- and long-run dynamics of interest rate and inflation of the United States. Basing upon quarterly as well as monthly data over the period 1957 to 2010, we find evidence that interest rate behaviour of the Federal Reserve is consistent with the Taylor principle in short run and with the Fisher hypothesis in long run. Entire sample justifies the existence of a long run cointegrating relationship between federal funds rate and inflation characterised as the Fisher effect. When data are split into different subsamples, the cointegrating relationship disappears. Interest rate dynamics of pre-1980 and post-2001 neither track Fisher hypothesis nor Taylor principle, rather represent substantial discretion.

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    Bibliographic Info

    Article provided by Faculty of Management, Academy of Economic Studies, Bucharest, Romania in its journal ECONOMIA seria MANAGEMENT / ECONOMY - MANAGEMENT series.

    Volume (Year): 15 (2012)
    Issue (Month): 1 (June)
    Pages: 189-203

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    Handle: RePEc:rom:econmn:v:15:y:2012:i:1:p:189-203

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    Related research

    Keywords: Fisher Effect; Monetary Policy; Taylor Principle.;

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    1. Robert B. Barsky, 1986. "The Fisher Hypothesis and the Forecastability and Persistence of Inflation," NBER Working Papers 1927, National Bureau of Economic Research, Inc.
    2. Hakan Berument & Mohamed Mehdi Jelassi, 2002. "The Fisher hypothesis: a multi-country analysis," Applied Economics, Taylor & Francis Journals, vol. 34(13), pages 1645-1655.
    3. Brigitte Granville & Sushanta Mallick, 2004. "Fisher hypothesis: UK evidence over a century," Applied Economics Letters, Taylor & Francis Journals, vol. 11(2), pages 87-90.
    4. Herwartz, Helmut & Reimers, Hans-Eggert, 2006. "Modelling the Fisher hypothesis: World wide evidence," Economics Working Papers 2006,04, Christian-Albrechts-University of Kiel, Department of Economics.
    5. Beyer, Andreas & Haug, Alfred A. & Dewald, William G., 2009. "Structural breaks, cointegration and the Fisher effect," Working Paper Series 1013, European Central Bank.
    6. William J. Crowder, 1997. "The Long-Run Fisher Relation in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1124-42, November.
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