The long-run Fisher effect: can it be tested?
AbstractEmpirical support for the long-run Fisher effect, a hypothesis that a permanent change in inflation leads to an equal change in the nominal interest rate, has been hard to come by. This paper provides a plausible explanation of why past studies have been unable to find support for the long-run Fisher effect. This paper argues that the necessary permanent change to the inflation rate following a monetary shock has not occurred in the industrialized countries of Australia, Austria, Belgium, Canada, Denmark, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States. Instead, this paper shows that inflation in these countries follows a mean-reverting, fractionally integrated, long-memory process, not the nonstationary inflation process that is integrated of order one or larger found in previous studies of the Fisher effect. Applying a bivariate maximum likelihood estimator to a fractionally integrated model of inflation and the nominal interest rate, the inflation rate in all seventeen countries is found to be a highly persistent, fractionally integrated process with a positive differencing parameter significantly less than one. Hence, in the long run, inflation in these countries will be unaffected by a monetary shock, and a test of the long-run Fisher effect will be invalid and uninformative as to the truthfulness of the long-run Fisher effect hypothesis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2006-11.
Date of creation: 2006
Date of revision:
Other versions of this item:
- NEP-ALL-2006-09-16 (All new papers)
- NEP-CBA-2006-09-16 (Central Banking)
- NEP-IFN-2006-09-16 (International Finance)
- NEP-KNM-2006-09-16 (Knowledge Management & Knowledge Economy)
- NEP-MAC-2006-09-16 (Macroeconomics)
- NEP-MON-2006-09-16 (Monetary Economics)
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.:
- John Huizinga & Frederic S. Mishkin, 1985.
"Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates,"
NBER Working Papers
1678, National Bureau of Economic Research, Inc.
- Huizinga, John & Mishkin, Frederic S., 1986. "Monetary policy regime shifts and the unusual behavior of real interest rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 231-274, January.
- Sowell, Fallaw, 1990. "The Fractional Unit Root Distribution," Econometrica, Econometric Society, vol. 58(2), pages 495-505, March.
- Diebold, Francis X. & Rudebusch, Glenn D., 1991.
"On the power of Dickey-Fuller tests against fractional alternatives,"
Elsevier, vol. 35(2), pages 155-160, February.
- Francis X. Diebold & Glenn D. Rudebusch, 1990. "On the power of Dickey-Fuller tests against fractional alternatives," Finance and Economics Discussion Series 119, Board of Governors of the Federal Reserve System (U.S.).
- Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
- Koustas, Zisimos & Serletis, Apostolos, 1999.
"On the Fisher effect,"
Journal of Monetary Economics,
Elsevier, vol. 44(1), pages 105-130, August.
- Robert G. King & Mark W. Watson, 1997.
"Testing long-run neutrality,"
Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
- Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
- Sargent, Thomas J, 1971. "A Note on the 'Accelerationist' Controversy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 721-25, August.
- Souza, Leonardo Rocha, 2003.
"A note on Chambers's "long memory and aggregation in macroeconomic time series","
Economics Working Papers (Ensaios Economicos da EPGE)
503, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Leonardo Rocha Souza, 2005. "A Note On Chambers'S "Long Memory And Aggregation In Macroeconomic Time Series"," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 1059-1062, 08.
- Bae, Sang-Kun & Jensen, Mark J. & Murdock, Scott G., 2005. "Long-run neutrality in a fractionally integrated model," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 257-274, June.
- Jensen, Mark J. & Liu, Ming, 2006. "Do long swings in the business cycle lead to strong persistence in output?," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 597-611, April.
- Diebold, Francis X. & Inoue, Atsushi, 2001.
"Long memory and regime switching,"
Journal of Econometrics,
Elsevier, vol. 105(1), pages 131-159, November.
- Chambers, Marcus J, 1998.
"Long Memory and Aggregation in Macroeconomic Time Series,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1053-72, November.
- Marcus J. Chambers, . "Long Memory and Aggregation in Macroeconomic Time Series," Economics Discussion Papers 437, University of Essex, Department of Economics.
- Weber, Axel A, 1994. "Testing Long-run Neutrality: Empirical Evidence for G7 Countries with Special Emphasis on Germany," CEPR Discussion Papers 1042, C.E.P.R. Discussion Papers.
- 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.
- Martin D.D. Evans & Karen K. Lewis, 1993. "Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Working Papers 93-06, New York University, Leonard N. Stern School of Business, Department of Economics.
- Beyer, Andreas & Haug, Alfred A. & Dewald, William G., 2009. "Structural breaks, cointegration and the Fisher effect," Working Paper Series 1013, European Central Bank.
- Robinson Kruse & Daniel Ventosa-Santaulària & Antonio E. Noriega, 2013. "Changes in persistence, spurious regressions and the Fisher hypothesis," CREATES Research Papers 2013-11, School of Economics and Management, University of Aarhus.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector).
If references are entirely missing, you can add them using this form.