The Long-Run Fisher Effect: Can It Be Tested?
In this paper, I provide a plausible explanation as to why past studies have been unable to find support for the long-run Fisher effect. My argument is that exogenous shocks to the inflation rates in industrialized economies have not produced the permanent change to inflation necessary for testing the Fisher effect. Instead of finding a nonstationary, unit-root process for inflation like previous Fisher effect studies, here each country's inflation rate is found to follow a mean-reverting, fractionally integrated, long-memory process. Applying a bivariate, maximum likelihood estimator to a multivariate, fractionally integrated model of inflation and nominal interest, I find that the estimated inflation rates in 17 developed countries are highly persistent, fractionally integrated, mean-reverting processes with order of integration parameters significantly less than one. Since a permanent change to inflation has not occurred, a test of whether a permanent change to inflation affects the nominal interest rate one-for-one will be uninformative as to the truth or fallacy of the Fisher effect hypothesis. Copyright (c) 2009 The Ohio State University.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 41 (2009)
Issue (Month): 1 (02)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879|
References listed on IDEAS
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.:
- Weber, Axel A, 1994. "Testing Long-run Neutrality: Empirical Evidence for G7 Countries with Special Emphasis on Germany," CEPR Discussion Papers 1042, C.E.P.R. Discussion Papers.
- Diebold, Francis X. & Inoue, Atsushi, 2001.
"Long memory and regime switching,"
Journal of Econometrics,
Elsevier, vol. 105(1), pages 131-159, November.
- Sargent, Thomas J, 1971. "A Note on the 'Accelerationist' Controversy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(3), pages 721-25, August.
- Marcus J. Chambers, .
"Long Memory and Aggregation in Macroeconomic Time Series,"
Economics Discussion Papers
437, University of Essex, Department of Economics.
- Chambers, Marcus J, 1998. "Long Memory and Aggregation in Macroeconomic Time Series," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1053-72, November.
- Leonardo Rocha Souza, 2005.
"A Note On Chambers'S "Long Memory And Aggregation In Macroeconomic Time Series","
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 1059-1062, 08.
- Souza, Leonardo Rocha, 2003. "A note on Chambers's "long memory and aggregation in macroeconomic time series"," Economics Working Papers (Ensaios Economicos da EPGE) 503, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
- Robert G. King & Mark W. Watson, 1997.
"Testing long-run neutrality,"
Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
- Evans, Martin D D & Lewis, Karen K, 1995.
" Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?,"
Journal of Finance,
American Finance Association, vol. 50(1), pages 225-53, March.
- Martin D.D. Evans & Karen K. Lewis, 1993. "Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Working Papers 93-06, New York University, Leonard N. Stern School of Business, Department of Economics.
- Koustas, Z., Serletis, A., 1998.
"On the Fisher Effect,"
98-09, Calgary - Department of Economics.
- Diebold, Francis X. & Rudebusch, Glenn D., 1991.
"On the power of Dickey-Fuller tests against fractional alternatives,"
Elsevier, vol. 35(2), pages 155-160, February.
- Francis X. Diebold & Glenn D. Rudebusch, 1990. "On the power of Dickey-Fuller tests against fractional alternatives," Finance and Economics Discussion Series 119, Board of Governors of the Federal Reserve System (U.S.).
- John Huizinga & Frederic S. Mishkin, 1985.
"Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates,"
NBER Working Papers
1678, National Bureau of Economic Research, Inc.
- Huizinga, John & Mishkin, Frederic S., 1986. "Monetary policy regime shifts and the unusual behavior of real interest rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 24(1), pages 231-274, January.
- Jensen, Mark J. & Liu, Ming, 2006. "Do long swings in the business cycle lead to strong persistence in output?," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 597-611, April.
- Bae, Sang-Kun & Jensen, Mark J. & Murdock, Scott G., 2005. "Long-run neutrality in a fractionally integrated model," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 257-274, June.
- Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
- Sowell, Fallaw, 1990. "The Fractional Unit Root Distribution," Econometrica, Econometric Society, vol. 58(2), pages 495-505, March.
When requesting a correction, please mention this item's handle: RePEc:mcb:jmoncb:v:41:y:2009:i:1:p:221-231. 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: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
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.