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Changes in Regime and the Long Run Fisher Effect: a Threshold Cointegration Analysis

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  • Henry, O.T.

Abstract

The Fisher equation predicts that nominal interest rates and inflation should move together one-for-one. Recently published work argues that both nominal interest rates and inflation are non-linear. The evidence in this paper suggests that nominal interest rates are well described as two-regime threshold unit root processes. However, inflation and real interest rates appear to be stationary threshold processes. This is consistent with a threshold processes. This is consistent with a threshold cointegrating relationship between nominal interest rates and inflation. The long run Fisher equation describes the relationship between real interest rate inflation in periods of high inflation. In the low inflation regime shocks to real interest rates are highly persistent.

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 720.

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Length: 29 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:mlb:wpaper:720

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Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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Web page: http://www.economics.unimelb.edu.au
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Keywords: INTEREST RATE ; MACROECONOMICS ; ECONOMIC THEORY;

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Cited by:
  1. Nicolas Million, 2006. "Changements de régime pour la persistance et la dynamique du taux d'intérêt réel américain," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00119051, HAL.

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