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The Fisher Effect and The Long–Run Phillips Curve --in the case of Japan, Sweden and Italy --

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  • Miyagawa, Shigeyoshi

    ()
    (Kyoto Gakuen University, Department of Economics)

  • Morita, Yoji

    (Kyoto Gakuen University, Department of Economics)

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    Abstract

    The object of the paper is to attempt to assess the two classical long-run neutrality; the Fisherian link between inflation rate and nominal interest rate, and the natural rate hypothesis proposed by Friedman(1968) and Phellps (1967, 1968). We use the quarterly data for Japan, Sweden and Italy. In order to investigate the classical long-run neutrality, we use the non-structural bivariate autoregressive methodology King and Watson (1997) developed to avoid the Lucas-Sargent critique. They showed that long-run neutrality can be tested with limited structural information when nominal variables are integrated. We pay close attention to the unit root properties of the data, since it takes very crucial role in applying their methodology. Our test results show that all data of Japan, Sweden and Italy we use here do not have unit root and cointegration. The empirical evidences of the Fisherian link and the long-run Phillips curve in Japan, Sweden and Italy are consistent with those of United States by King and Watson (1997). The classical Fisherian link which means that permanent shift in inflation rate will have no effect on real interest rate would not be accepted. On the contrary, we could find little evidence against the vertical long-run Phillips curve. A long-run trade off between inflation and unemployment was rejected.

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    File URL: http://hdl.handle.net/2077/2832
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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 77.

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    Length: 20 pages
    Date of creation: 31 Aug 2002
    Date of revision: 27 Mar 2003
    Handle: RePEc:hhs:gunwpe:0077

    Contact details of provider:
    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/
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    Keywords: long-run neutrality; unit root; cointegration;

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    References

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    1. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation for Research in Economics, Yale University.
    2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
    3. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
    4. Robert King & Mark W. Watson, 1992. "Testing Long Run Neutrality," NBER Working Papers 4156, National Bureau of Economic Research, Inc.
    5. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
    6. Christiano, Lawrence J & Eichenbaum, Martin, 1995. "Liquidity Effects, Monetary Policy, and the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1113-36, November.
    7. Koustas, Zisimos & Serletis, Apostolos, 1999. "On the Fisher effect," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 105-130, August.
    8. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
    9. Martin Feldstein & Lawrence Summers, 1983. "Inflation, Tax Rules, and the Long-term Interest Rate," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 153-185 National Bureau of Economic Research, Inc.
    10. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
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