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Interest rate and inflation expectations in Finland 1987-1994 : a case for the inverted fisher hypothesis

  • Mika Linden

    (University of Helsinki, Finland)

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    The relationship between interest rates and the rate of inflation is analyzed with cointegration methods in the context of the inverted Fisher hypothesis. The hypothesis is not rejected. The results indicate that the main reasons for the interest rate behaviour in the period 1987/1-1 995/III were positive and over reacting dependence on foreign interest rates and negative dependence on the exchange rate. Real interest rates react to the inflation rate with a coefficient value of close to -1, and the inflation effects on the nominal rates are insignificant. One step recursive predictions of inflation process support the existence of a negative price expectations effect on the real interest rates.

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    File URL: http://taloustieteellinenyhdistys.fi/images/stories/fep/f1995_2e.pdf
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    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 8 (1995)
    Issue (Month): 2 (Autumn)
    Pages: 108-115

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    Handle: RePEc:fep:journl:v:8:y:1995:i:2:p:108-115
    Contact details of provider: Web page: http://www.taloustieteellinenyhdistys.fi

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    1. Wray, L Randall, 1992. "Alternative Theories of the Rate of Interest," Cambridge Journal of Economics, Oxford University Press, vol. 16(1), pages 69-89, March.
    2. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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