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A long memory test of the long-run Fisher effect in the G7 countries

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Author Info
Noor A. Ghazali
Shamshubariah Ramlee
Abstract

The belief that short-term interest rates respond positively to changes in price level, commonly known as the Fisher effect, are currently being investigated extensively by financial researchers. Over the long run the hypothesis implies the presence of an equilibrium relationship between interest rates and inflation. Early evidence favouring the Fisher effect is found not to be consistent in certain time periods and some countries. This paper examines the presence of the effect in the G7 countries. An ARFIMA (Autoregressive Fractionally Integrated Moving Average) model is employed that generalizes the standard ARIMA by allowing fractional differencing. Based on the generalized ARFIMA estimation, the cointegration hypothesis between short-term interest rates and inflation cannot be supported. Interest rates in the G7 countries are not linked to inflation rate in the long run. The puzzling evidence rejecting the Fisher effect remains as the proposed relationship between interest rates and inflation is not real in these countries.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 13 (2003)
Issue (Month): 10 (October)
Pages: 763-769
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Handle: RePEc:taf:apfiec:v:13:y:2003:i:10:p:763-769

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Westerlund, Joakim, 2005. "Panel Cointegration Tests of the Fisher Hypothesis," Working Papers 2005:10, Lund University, Department of Economics. [Downloadable!]
  2. Westerlund, Joakim, 2006. "Panel Cointegration Tests of the Fisher Effect," Research Memoranda 054, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  3. Eric Tymoigne, 2006. "FisherÕs Theory of Interest Rates and the Notion of ÒRealÓ: A Critique," Economics Working Paper Archive wp_483, Levy Economics Institute, The. [Downloadable!]
  4. Saadet Kirbas Kasman & Adnan Kasman & Evrim Turgutlu, 2005. "Fisher Hypothesis Revisited: A Fractional Cointegration Analysis," Discussion Paper Series 05/04, Dokuz Eylül University, Faculty of Business, Department of Economics, revised 23 Nov 2005. [Downloadable!]
  5. Joakim Westerlund, 2008. "Panel cointegration tests of the Fisher effect," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 193-233. [Downloadable!]
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