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Testing the Fisher Effect in the US

Author

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  • Yifei Cai

    (Department of Economics, UWA Business School, The University of Western Australia)

Abstract

To apply Quantile Unit Root test and Quantile Cointegration test, this paper revisits the classical Fisher hypothesis. Due to the lower power of conventional unit root tests and Engle-Granger cointegration test, these two newly proposed econometric models shed similar light from different angles. The Quantile Cointegration test indicates that the real interest rate is stationary, which is in line with Fisher Effects. Besides, the empirical results also show asymmetric performance in the mean-reverting process. Likewise, the Quantile Cointegration test reports full Fisher Effects in the upper quantiles, and Fisher puzzles in the lower quantiles by using nominal interest rate and inflation rate. These findings have meaningful economic implications for the US monetary policy authorities. Specifically, the monetary policy authority should pay attention to these asymmetries when making monetary policies, especially avoiding the negative effects of tight monetary policy on mild inflation. Besides, under the condition of hyperinflation, the interest rate would play a one to one role in curbing the irrational inflation.

Suggested Citation

  • Yifei Cai, 2018. "Testing the Fisher Effect in the US," Economics Bulletin, AccessEcon, vol. 38(2), pages 1014-1027.
    • Handle: RePEc:ebl:ecbull:eb-17-00307
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Fisher Hypothesis; Quantile Unit Root Test; Quantile Cointegration Test; Asymmetric Properties;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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