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A Long-Run Non-Linear Approach to the Fisher Effect

  • DIMITRIS K. CHRISTOPOULOS
  • MIGUEL A. LEÃN-LEDESMA

We argue that the empirical failure of the Fisher effect found in the literature may be due to the existence of non-linearities in the long-run relationship between interest rates and inflation. We present evidence that, for the U.S. during the 1960-2004 period, the Fisher relation presents important non-linearities. We model the long-run non-linear relationship and find that an ESTR model for the pre-Volcker era and an LSTR model for the post-Volcker era are able to control for non-linearities and constitute long-run co-integration vectors. Monte Carlo evidence produces support for the hypothesis that non-linearities may also be responsible for the less than proportional coefficients of inflation usually found in the linear specifications. Copyright 2007 The Ohio State University.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 2-3 (03)
Pages: 543-559

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:2-3:p:543-559
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