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An Empirical Examination of the Fisher Effect in Australia

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Author Info
Frederic S. Mishkin
John Simon

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Abstract

This paper analyzes the Fisher effect in Australia. Initial testing indicates that both interest rates and inflation contain unit roots. Furthermore, there are indications that the variables have non-standard error processes. To overcome problems associated with this and derive the correct small sample distributions of test statistics we make use of Monte Carlo simulations. These tests indicate that while a long-run Fisher effect seems to exist there is no evidence of a short-run Fisher effect. This suggests that, while short-run changes in interest rates reflect changes in monetary policy, longer-run levels indicate inflationary expectations. Thus, the longer-run level of interest rates should not be used to characterize the stance of monetary policy.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5080.

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Date of creation: Jul 1997
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Handle: RePEc:nbr:nberwo:5080

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Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
G0 - Financial Economics - - General

References listed on IDEAS
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.:

  1. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
    Other versions:
  2. Frederic S. Mishkin, 1985. "The Real Interest Rate: A Multi-Country Empirical Study," NBER Working Papers 1047, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Robert E. Cumby & Frederic S. Mishkin, 1987. "The International Linkage of Real Interest Rates: The European - U.S. Connection," NBER Working Papers 1423, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  5. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  6. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December. [Downloadable!] (restricted)
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  7. 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, vol. 67(3), pages 478-86, June. [Downloadable!] (restricted)
  8. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-62, April.
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  9. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
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  10. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323. [Downloadable!] (restricted)
  11. Carmichael, Jeffrey & Stebbing, Peter W, 1983. "Fisher's Paradox and the Theory of Interest," American Economic Review, American Economic Association, vol. 73(4), pages 619-30, September. [Downloadable!] (restricted)
  12. DeJong, David N, et al, 1992. "Integration versus Trend Stationarity in Time Series," Econometrica, Econometric Society, vol. 60(2), pages 423-33, March. [Downloadable!] (restricted)
  13. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  14. Schwert, G. William, 1987. "Effects of model specification on tests for unit roots in macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 20(1), pages 73-103, July. [Downloadable!] (restricted)
  15. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July. [Downloadable!] (restricted)
  16. 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. [Downloadable!] (restricted)
  17. Mishkin, F.S., 1988. "Understanding Real Interest Rates," Papers fb-_88-40, Columbia - Graduate School of Business.
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  18. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March. [Downloadable!] (restricted)
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  19. Huizinga, John & Mishkin, Frederic S, 1984. " Inflation and Real Interest Rates on Assets with Different Risk Characteristics," Journal of Finance, American Finance Association, vol. 39(3), pages 699-712, July. [Downloadable!] (restricted)
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  20. Maurice Obstfeld & Robert E. Cumby & John Huizinga, 1983. "Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations," NBER Technical Working Papers 0011, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)

  1. Herwartz, Helmut & Reimers, Hans-Eggert, 2006. "Modelling the Fisher hypothesis: World wide evidence," Economics Working Papers 2006,04, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
  2. Pierre St-Amant, 1996. "Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest Rates Using Structural VAR Methodology," Macroeconomics 9602004, EconWPA. [Downloadable!]
    Other versions:
  3. Christopher J. Neely & David E. Rapach, 2008. "Real interest rate persistence: evidence and implications," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 609-642. [Downloadable!]
    Other versions:
  4. John Simon, 1996. "A Markov-Switching Model of Inflation in Australia," RBA Research Discussion Papers rdp9611, Reserve Bank of Australia. [Downloadable!]
  5. Helmut Herwartz & Hans-Eggert Reimers, 2006. "Panel non stationary tests of the Fisher hypothesis in a world wide context. An analysis of 114 economies during the period 1960-2004," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3). [Downloadable!] (restricted)
  6. Lee, King Fuei, 2007. "An Empirical Study of the Fisher Effect and the Dynamic Relation Between Nominal Interest Rate and Inflation in Singapore," MPRA Paper 12383, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  7. Jääskelä, Jarkko & Vilmunen, Jouko, 1999. "Anticipated Monetary Policy and the Dynamic Behaviour of the Term Structure of Interest Rates," Research Discussion Papers 12/1999, Bank of Finland. [Downloadable!]
  8. Hakan Berument & Kamuran Malatyali, 1999. "Determinants of interest rates in Turkey," Discussion Papers 9902, Research and Monetary Policy Department, Central Bank of the Republic of Turkey. [Downloadable!]
  9. Steven Morling & Robert Subbaraman, 1995. "Superannuation and Saving," RBA Research Discussion Papers rdp9511, Reserve Bank of Australia. [Downloadable!]
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