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Near unit root and the relationship between inflation and interest rates: A reexamination of the Fisher effect

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  • Markku Lanne

    () (Research Unit on Economic Structures and Growth, Department of Economics, P.O. Box 54 , FIN-00014 University of Helsinki, Finland)

Abstract

Tests of the Fisher effect are plagued by high persistence in interest rates. Instead of standard regression analysis and asymptotic results, methods relying on local-to-unity asymptotics are employed in testing for the Fisher effect with monthly U.S. data covering the period 1953:1-1990:12. These procedures are extensions of a recently presented method (Cavanagh, Elliott and Stock (1995)) based on simultaneous confidence intervals, and they have the advantage of being asymptotically valid whether interest rates are integrated of order one or zero, or near unit root processes. Taking appropriately account of the near unit root problem the findings in most of the previous literature are reconfirmed. There is support for the Fisher effect in the interest rate targeting period (1953:1-1979:10) of the Federal Reserve but not in the 1979:11-1990:12 period.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 26 (2001)
Issue (Month): 2 ()
Pages: 357-366

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Handle: RePEc:spr:empeco:v:26:y:2001:i:2:p:357-366

Note: received: July 1999/Final version received: April 2000
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Related research

Keywords: Fisher effect · near unit root · monetary policy;

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Cited by:
  1. Sophocles N. Brissimis & Petros M. Migiakis, 2013. "Inflation persistence and the rationality of inflation expectations," Working Papers 151, Bank of Greece.
  2. Lanne , Markku, 2002. "Nonlinear dynamics of interest rate and inflation," Research Discussion Papers 21/2002, Bank of Finland.
  3. Beechey, Meredith & Hjalmarsson, Erik & sterholm, Pr, 2009. "Testing the expectations hypothesis when interest rates are near integrated," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 934-943, May.
  4. Dimitris A. Georgoutsos & Petros Migiakis, 2012. "Heterogeneity of the determinants of euro-area sovereign bond spreads; what does it tell us about financial stability?," Working Papers 143, Bank of Greece.
  5. Lai, Kon S., 2004. "On structural shifts and stationarity of the ex ante real interest rate," International Review of Economics & Finance, Elsevier, vol. 13(2), pages 217-228.
  6. Sofiane H. Sekioua, 2004. "Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the dominant root and half-lives of shocks," Money Macro and Finance (MMF) Research Group Conference 2004 91, Money Macro and Finance Research Group.
  7. Lai, Kon S., 2008. "The puzzling unit root in the real interest rate and its inconsistency with intertemporal consumption behavior," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 140-155, February.

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