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The Inverted Fisher Hypothesis

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Author Info

  • Woon Gyu Choi

Abstract

This paper examines the implications of inflation persistence for the inverted Fisher hypothesis that nominal interest rates do not adjust to inflation because of a high degree of substitutability between money and bonds. It is emphasized that the substitutability between nominal assets and capital renders the hypothesis inconsistent with the data when inflation persistence is high. Using a switching regression model, the analysis allows the reflection of inflation in interest rates to vary according to the degree of inflation persistence or forecastability. The hypothesis is supported by U.S. data only when inflation forecastability is below a certain threshold.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 00/194.

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Length: 36
Date of creation: 01 Dec 2000
Date of revision:
Handle: RePEc:imf:imfwpa:00/194

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Related research

Keywords: Economic forecasting; Economic models; inflation; nominal interest rate; inflation process; high inflation; inflation rate; real interest rate; monetary policy; effect of inflation; real interest rates; low inflation; monetary system; nominal interest rates; increase in inflation; price level; monetary fund; actual inflation; nominal rate of return; fiduciary monetary system; inflation forecasts; inflation rates; monetary economics; moderate inflation; real output; money growth; real rate of interest; measure of inflation; rates of inflation; inflation targeting; rate of inflation; high rates of inflation; money demand; discount rate; real rates; demand for money; inflation equation; reserve requirements; expectations of inflation; fisher relation; inflationary policy; monetary standard; monetary authority; distribution of inflation; coefficient on inflation; monetary regime; inflationary expectations;

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Cited by:
  1. John W. Galbraith & Greg Tkacz, 2007. "How Far Can Forecasting Models Forecast? Forecast Content Horizons for Some Important Macroeconomic Variables," Working Papers 07-1, Bank of Canada.

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