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Does nonlinearity help resolve the Fisher effect puzzle?

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  • Gawon Yoon

Abstract

Even though there is little evidence for linear cointegration, Christopoulos and Leon-Ledesma (2007) recently have found nonlinear cointegrating relations between the US quarterly nominal interest rate and CPI inflation rate. Through Monte Carlo simulations, they also show that the nonlinear relations are responsible for the 'Fisher effect puzzle' of less than a proportional coefficient of inflation in the linear Fisher relation. We provide, in this study, an explanation of their simulation results on the Fisher effect puzzle and further examine if nonlinear relations really help resolving the puzzle.

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  • Gawon Yoon, 2010. "Does nonlinearity help resolve the Fisher effect puzzle?," Applied Economics Letters, Taylor & Francis Journals, vol. 17(8), pages 823-828.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:8:p:823-828
    DOI: 10.1080/13504850802481772
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    References listed on IDEAS

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    1. Joakim Westerlund, 2008. "Panel cointegration tests of the Fisher effect," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 193-233.
    2. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-1042, November.
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    Cited by:

    1. Anari, Ali & Kolari, James, 2019. "The Fisher puzzle, real rate anomaly, and Wicksell effect," Journal of Empirical Finance, Elsevier, vol. 52(C), pages 128-148.
    2. O Bajo-Rubio & C Diaz-Roldan & V Esteve, 2010. "Testing the Fisher effect in the presence of structural change: A case study of the UK, 1966-2007," Economic Issues Journal Articles, Economic Issues, vol. 15(2), pages 1-16, September.
    3. Anari, Ali & Kolari, James, 2016. "Dynamics of interest and inflation rates," Journal of Empirical Finance, Elsevier, vol. 39(PA), pages 129-144.
    4. Frederick H Wallace, 2012. "Testing for a nonlinear Fisher relationship," Economics Bulletin, AccessEcon, vol. 32(1), pages 823-829.
    5. Andrew Phiri & Lutho Mbekeni, 2021. "Fisher’s hypothesis, survey-based expectations and asymmetric adjustments: Empirical evidence from South Africa," International Economics and Economic Policy, Springer, vol. 18(4), pages 825-846, October.
    6. Arnold, Stephan & Auer, Benjamin R., 2015. "What do scientists know about inflation hedging?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 187-214.

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