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Structural Breaks, Inflation and Interest Rates: Evidence from the G7 Countries

Author

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  • Jesús Clemente

    (Department of Economic Analysis, University of Zaragoza, Gran Vía 2, 50006 Zaragoza, Spain)

  • María Dolores Gadea

    (Department of Applied Economics, University of Zaragoza, Gran Vía 2, 50006 Zaragoza, Spain)

  • Antonio Montañés

    (Department of Economic Analysis, University of Zaragoza, Gran Vía 2, 50006 Zaragoza, Spain)

  • Marcelo Reyes

    (Department of Economic Analysis, University of Zaragoza, Gran Vía 2, 50006 Zaragoza, Spain)

Abstract

This study reconsiders the common unit root/co-integration approach to test for the Fisher effect for the economies of the G7 countries. We first show that nominal interest and inflation rates are better represented as I(0) variables. Later, we use the Bai–Perron procedure to show the existence of structural changes in the Fisher equation. After considering these breaks, we find very limited evidence of a total Fisher effect as the transmission coefficient of the expected inflation rates to nominal interest rates is very different than one.

Suggested Citation

  • Jesús Clemente & María Dolores Gadea & Antonio Montañés & Marcelo Reyes, 2017. "Structural Breaks, Inflation and Interest Rates: Evidence from the G7 Countries," Econometrics, MDPI, vol. 5(1), pages 1-17, February.
    • Handle: RePEc:gam:jecnmx:v:5:y:2017:i:1:p:11-:d:90640
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    More about this item

    Keywords

    unit roots; structural breaks; interest rates; inflation; Fisher effect;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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