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The Fisher Hypothesis and the Forecastability and Persistence of Inflation

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  • Robert B. Barsky

Abstract

For the period 1860 to 1939, the simple correlation of the U.S. commercial paper rate with the contemporaneous inflation rate is -.17. The corresponding correlation for the period 1950 to 1979 is .71. Inflation evolved from essentially a white noise process in the pre-World War I years to a highly persistent, nonstationary ARIMA process in the post-1960 period. I argue that the appearance of an ex post Fisher effect for the first time after 1960 reflects this change in the stochastic process of inflation, rather than a change in any structural relationship between nominal rates and expectedi nflation. I find little evidence of inflation non-neutrality in data from the gold standard period.This contradicts the conclusion of a frequently cited study by Lawrence Summers, who examined the low frequency relationship between inflation and interest rates using band spectrum regression. Deriving and implementing a frequency domain version of the Theil misspecification theorem, I find that neither high frequency nor low frequency movements in gold standard inflation rates were forecastable. Thus even if nominal rates responded fully to expected inflation, one would expect to find the zero coefficient obtained by Summers.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1927.

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Date of creation: May 1986
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Publication status: published as Barsky, Robert B. "The Fisher Hypothesis and the Forecastibility and Persistence of Inflation," Journal of Monetary Economics, Jan. 1987.
Handle: RePEc:nbr:nberwo:1927

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  1. Barsky, Robert B & Summers, Lawrence H, 1988. "Gibson's Paradox and the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 528-50, June.
  2. Thomas J. Sargent, 1971. "Interest rates and prices in the long run: a study of the Gibson paradox," Working Papers 75, Federal Reserve Bank of Minneapolis.
  3. N. Gregory Mankiw & Jeffrey A. Miron, 1985. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc.
  4. Milton Friedman & Anna J. Schwartz, 1976. "From Gibson to Fisher," NBER Chapters, in: Explorations in Economic Research, Volume 3, number 2 (Conference on International Trade, Finance, and Development of Pacific Basin Countries, Decembe, pages 130-133 National Bureau of Economic Research, Inc.
  5. Barthold, Thomas A & Dougan, William R, 1986. "The Fisher Hypothesis under Different Monetary Regimes," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 674-79, November.
  6. McCallum, Bennett T., 1984. "On low-frequency estimates of long-run relationships in macroeconomics," Journal of Monetary Economics, Elsevier, vol. 14(1), pages 3-14, July.
  7. Engle, Robert F, 1974. "Band Spectrum Regression," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(1), pages 1-11, February.
  8. Hugh Rockoff, 1984. "Some Evidence on the Real Price of Gold, Its Costs of Production, and Commodity Prices," NBER Chapters, in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 613-650 National Bureau of Economic Research, Inc.
  9. Shiller, Robert J & Siegel, Jeremy J, 1977. "The Gibson Paradox and Historical Movements in Real Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 891-907, October.
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