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The Fisher hypothesis and the forecastability and persistence of inflation

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  • Barsky, Robert B.

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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  • Barsky, Robert B., 1987. "The Fisher hypothesis and the forecastability and persistence of inflation," Journal of Monetary Economics, Elsevier, vol. 19(1), pages 3-24, January.
  • Handle: RePEc:eee:moneco:v:19:y:1987:i:1:p:3-24
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    1. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 211-228.
    2. Sargent, Thomas J, 1973. "Interest Rates and Prices in the Long Run: A Study of the Gibson Paradox," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 385-449, Part II F.
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    5. Milton Friedman & Anna J. Schwartz, 1976. "From Gibson to Fisher," NBER Chapters, in: Explorations in Economic Research, Volume 3, number 2, pages 288-291, National Bureau of Economic Research, Inc.
    6. 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.
    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. 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 528-550, June.
    9. 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 674-679, November.
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