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Does the Long-Term Interest Rate Predict Future Inflation? A Multi-country Analysis

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  • Engsted, Tom

Abstract

According to the Fisher hypothesis, an increase (decrease) in the spread between the long-term, or multiperiod, interest rate and the one-period inflation rate signals an increase (decrease) in future one-period inflation. This implication is tested on data from thirteen OECD countries for the period 1962-93. Integration and cointegration techniques are applied to examine the time-series properties of interest rates and inflation rates, and the VAR methodology developed by John Y. Campbell and Robert J. Shiller (1987) is applied to examine the predictive power of the spread as well as in testing the Fisher hypothesis under rational expectations and constant ex ante real rates. Copyright 1995 by MIT Press.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 77 (1995)
Issue (Month): 1 (February)
Pages: 42-54

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Handle: RePEc:tpr:restat:v:77:y:1995:i:1:p:42-54

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. Malliaropulos, Dimitrios, 2000. "A note on nonstationarity, structural breaks, and the Fisher effect," Journal of Banking & Finance, Elsevier, vol. 24(5), pages 695-707, May.
  2. Yash P. Mehra, 1998. "The bond rate and actual future inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 27-47.
  3. Brand, Claus & Cassola, Nuno, 2000. "A money demand system for euro area M3," Working Paper Series 0039, European Central Bank.
  4. Engsted, Tom & Tanggaard, Carsten, 2001. "The Danish stock and bond markets: comovement, return predictability and variance decomposition," Journal of Empirical Finance, Elsevier, vol. 8(3), pages 243-271, July.
  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.
  6. Beyer, Andreas & Haug, Alfred A. & Dewald, William G., 2009. "Structural breaks, cointegration and the Fisher effect," Working Paper Series 1013, European Central Bank.
  7. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 609-642.
  8. Sharon Kozicki, 2001. "Why do central banks monitor so many inflation indicators?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-42.
  9. Booth, G. Geoffrey & Ciner, Cetin, 2001. "The relationship between nominal interest rates and inflation: international evidence," Journal of Multinational Financial Management, Elsevier, vol. 11(3), pages 269-280, July.
  10. Yash P. Mehra, 1997. "The bond rate and actual future inflation," Working Paper 97-03, Federal Reserve Bank of Richmond.
  11. NANDWA, Boaz, 2006. "On The Fisher Effect And Inflation Dynamics In Low-Income Countries: An Assessment Of Sub-Saharan Africa Economies," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(1).
  12. Mirdala, Rajmund, 2012. "Interest Rates Determination and Crisis Puzzle (Empirical Evidence from the European Transition Economies)," MPRA Paper 43756, University Library of Munich, Germany.
  13. Westerlund, Joakim, 2006. "Panel Cointegration Tests of the Fisher Effect," Research Memorandum 054, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  14. Engsted, Tom, 1998. "Money Demand During Hyperinflation: Cointegration, Rational Expectations, and the Importance of Money Demand Shocks," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 533-552, July.
  15. Faria, Joao Ricardo & Mollick, Andre Varella, 2004. "The nominal theory of interest under habit formation: evidence for the U.S., 1959-2002," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 333-354, December.
  16. Frank F. Gong & Eli M. Remolona, 1996. "Two factors along the yield curve," Research Paper 9613, Federal Reserve Bank of New York.
  17. Engsted, Tom, 2002. " Measures of Fit for Rational Expectations Models," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 301-55, July.
  18. Mirdala, Rajmund, 2009. "Vplyv inflačných očakávaní na vývoj úrokových sadzieb v krajinách Višegrádskej štvorky
    [Inflation expectations and interest rates development in the Visegrad countries]
    ," MPRA Paper 17059, University Library of Munich, Germany.
  19. Rapach, David E. & Weber, Christian E., 2004. "Are real interest rates really nonstationary? New evidence from tests with good size and power," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 409-430, September.

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