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Is it Really the Fisher Effect?

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Author Info
Johnson, Paul () (Vassar College Department of Economics)

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Abstract

Fahmy and Kandil [2003] use a cointegration approach to test for the Fisher effect in US interest rates during the 1980s and early 1990s. Here, I argue that even if nominal interest rates and inflation rates do obey integrated processes, cointegration of these two processes is not a sufficient condition for the Fisher effect to hold as it is consistent with any theory implying a stationary real interest rate. As the Fisher effect ex post implies that nominal interest rates embody an optimal inflation forecast, the sufficient condition for it to hold is the unpredictability of the implied inflation forecast error. This condition may be tested using the signal extraction framework of Durlauf and Hall [1988, 1989].

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Paper provided by Vassar College Department of Economics in its series Vassar College Department of Economics Working Paper Series with number 58.

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Date of creation: Jan 2004
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Handle: RePEc:vas:papers:58

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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. John Huizinga & Frederic S. Mishkin, 1986. "Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates," NBER Working Papers 1678, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Dutt, Swarna D & Ghosh, Dipak, 1995. "The Fisher Hypothesis: Examining the Canadian Experience," Applied Economics, Taylor and Francis Journals, vol. 27(11), pages 1025-30, November.
  3. Atkins, F J, 1989. "Co-integration, Error Correction and the Fisher Effect," Applied Economics, Taylor and Francis Journals, vol. 21(12), pages 1611-20, December.
  4. Carl Bonham, 1991. "Correct Cointegration Tests of the Long Run Relationship Between Nominal Interest and Inflation," Working Papers 199104, University of Hawaii at Manoa, Department of Economics.
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  5. Johnson, Paul A, 1994. "Estimation of the Specification Error in the Fisher Equation," Applied Economics, Taylor and Francis Journals, vol. 26(5), pages 519-26, May.
  6. William J. Crowder, 1997. "The Long-Run Fisher Relation in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1124-42, November. [Downloadable!] (restricted)
  7. Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-18, February. [Downloadable!] (restricted)
  8. Moazzami, Bakhtiar, 1991. "The Fisher Equation Controversy Re-examined," Applied Financial Economics, Taylor and Francis Journals, vol. 1(3), pages 129-33, September. [Downloadable!] (restricted)
  9. Fahmy, Yasser A. F. & Kandil, Magda, 2003. "The Fisher effect: new evidence and implications," International Review of Economics & Finance, Elsevier, vol. 12(4), pages 451-465. [Downloadable!] (restricted)
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  1. Ling, Tai-Hu & Liew, Venus Khim-Sen & Syed Khalid Wafa, Syed Azizi Wafa, 2007. "Fisher hypothesis: East Asian evidence from panel unit root tests," MPRA Paper 5432, University Library of Munich, Germany. [Downloadable!]
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