Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates
AbstractThe basic puzzle about the so-called Fisher effect, in which movements in short-term interest rates primarily reflect fluctuations in expected inflation, is why a strong Fisher effect occurs only for certain periods but not for others. This paper resolves this puzzle by reexamining the relationship between inflation and interest rates with modern time-series techniques. Recognition that the level of inflation and interest rates may contain stochastic trends suggests that the apparent ability of short-term interest rates to forecast inflation in the postwar United States is spurious. Additional evidence does not support the presence of a short-run Fisher effect but does support the existence of a long-run Fisher effect in which inflation and interest rates trend together in the long run when they exhibit trends. The evidence here can explain why the Fisher effect appears to be strong only for particular sample periods, but not for others. The conclusion that there is a long-run Fisher effect implies that when inflation and interest rates exhibit trends, these two series will trend together and thus there will be a strong correlation between inflation and interest rates. On the other hand, the nonexistence of a short-run Fisher effect implies that when either inflation and interest rates do not display trends, there is no long-run Fisher effect to produce a strong correlation between interest rates and inflation. The analysis in this paper resolves an important puzzle about when the Fisher effect appears in the data.
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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3632.
Date of creation: Feb 1991
Date of revision:
Publication status: published as Journal of Monetary Economics, Vol. 30, pp. 195-215 (1992).appendix published as "Nonstationarity of Regressors and Tests of Real-Interest Rate Behavior" in Journal of Business & Economics Studies, Vol 13, No.
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Mishkin, Frederic S., 1992. "Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 30(2), pages 195-215, November.
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.:
- repec:fth:harver:1466 is not listed on IDEAS
- Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, American Economic Association, vol. 65(3), pages 269-82, June.
- Robert B. Barsky, 1986.
"The Fisher Hypothesis and the Forecastability and Persistence of Inflation,"
NBER Working Papers
1927, National Bureau of Economic Research, Inc.
- Barsky, Robert B., 1987. "The Fisher hypothesis and the forecastability and persistence of inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 19(1), pages 3-24, January.
- Nelson, Charles R & Schwert, G William, 1977. "Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis That the Real Rate of Interest is Constant," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 478-86, June.
- Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, American Finance Association, vol. 43(5), pages 1095-1112, December.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.