Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates
The 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.
(This abstract was borrowed from another version of this item.)
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.:
- Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
- 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, vol. 65(3), pages 269-282, June.
- 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 478-486, June.
- 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.
- Robert B. Barsky, 1986. "The Fisher Hypothesis and the Forecastability and Persistence of Inflation," NBER Working Papers 1927, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:30:y:1992:i:2:p:195-215. See general 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: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.