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Inflation uncertainty and interest rates: is the Fisher relation universal?

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Author Info
Hakan Berument
Nildag Basak Ceylan
Hasan Olgun

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Abstract

This paper tests the validity of the Fisher hypothesis, which establishes a positive relation between interest rates and expected inflation, for the G7 countries and 45 developing economies. For this purpose, we estimate a version of the GARCH specification of the hypothesis for all countries included in the sample. We also test the augmented Fisher relation by including the inflation uncertainty in the equation. The simple Fisher relation holds in all G7 countries but in only 23 developing countries. There is a positive and statistically significant relationship between interest rates and inflation uncertainty for six of the G7 and 18 of the developing countries and this relationship is negative for seven developing countries.

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

Volume (Year): 39 (2007)
Issue (Month): 1 (January)
Pages: 53-68
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Handle: RePEc:taf:applec:v:39:y:2007:i:1:p:53-68

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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. Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August. [Downloadable!] (restricted)
  2. Berument, Hakan, 1999. "The Impact of Inflation Uncertainty on Interest Rates in the UK," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(2), pages 207-18, May. [Downloadable!] (restricted)
  3. Hsing, Yu, 1997. "The Fisher Hypothesis Revisited: New Evidence," Applied Economics, Taylor and Francis Journals, vol. 29(8), pages 1055-59, August. [Downloadable!] (restricted)
  4. Hakan Berument & Zubeyir Kilinc & Umit Ozlale, 2005. "The Missing Link Between Inflation Uncertainty And Interest Rates," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(2), pages 222-241, 05. [Downloadable!] (restricted)
  5. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Oxford University Press, vol. 13(2), pages 266-76, June.
  6. Davis, George & Kanago, Bryce, 1996. "On Measuring the Effect of Inflation Uncertainty on Real GNP Growth," Oxford Economic Papers, Oxford University Press, vol. 48(1), pages 163-75, January. [Downloadable!] (restricted)
  7. Olekalns, Nilss, 1996. "Further Evidence on the Fisher Effect," Applied Economics, Taylor and Francis Journals, vol. 28(7), pages 851-56, July. [Downloadable!] (restricted)
  8. Evans, Martin D D & Lewis, Karen K, 1995. " Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Journal of Finance, American Finance Association, vol. 50(1), pages 225-53, March. [Downloadable!] (restricted)
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