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Inflation uncertainty and interest rates: is the Fisher relation universal?

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  • Hakan Berument
  • Nildag Basak Ceylan
  • Hasan Olgun

Abstract

This paper tests the validity of the Fisher hypothesis, which establishes a positive relation between interest rates and expected inflation, for the G7 countries and 45 developing economies. For this purpose, we estimate a version of the GARCH specification of the hypothesis for all countries included in the sample. We also test the augmented Fisher relation by including the inflation uncertainty in the equation. The simple Fisher relation holds in all G7 countries but in only 23 developing countries. There is a positive and statistically significant relationship between interest rates and inflation uncertainty for six of the G7 and 18 of the developing countries and this relationship is negative for seven developing countries.

Suggested Citation

  • Hakan Berument & Nildag Basak Ceylan & Hasan Olgun, 2007. "Inflation uncertainty and interest rates: is the Fisher relation universal?," Applied Economics, Taylor & Francis Journals, vol. 39(1), pages 53-68.
  • Handle: RePEc:taf:applec:v:39:y:2007:i:1:p:53-68
    DOI: 10.1080/00036840500427908
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    1. 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 225-253, March.
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    7. Berument, Hakan, 1999. "The Impact of Inflation Uncertainty on Interest Rates in the UK," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(2), pages 207-218, May.
    8. Hakan Berument & Zubeyir Kilinc & Umit Ozlale, 2005. "The Missing Link Between Inflation Uncertainty And Interest Rates," Scottish Journal of Political Economy, Scottish Economic Society, vol. 52(2), pages 222-241, May.
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    Cited by:

    1. Shu-Chin Lin, 2009. "Inflation And Real Stock Returns Revisited," Economic Inquiry, Western Economic Association International, vol. 47(4), pages 783-795, October.
    2. Sadaf Zafar & Attiya Yasmin Javid, 2015. "Evaluation of Gold Investment as an Inflationary Hedge in Case of Pakistan," PIDE-Working Papers 2015:118, Pakistan Institute of Development Economics.
    3. Koziol, Philipp, 2014. "Inflation and interest rate derivatives for FX risk management: Implications for exporting firms under real wealth," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(4), pages 459-472.
    4. Burak Güriş & Yaşar Yaşgül, 2015. "Does the Fisher hypothesis hold for the G7 countries? Evidence from ADL threshold cointegration test," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(6), pages 2549-2557, November.
    5. Habib Rahman & Hasan Mohsin, 2011. "Monetary Policy Announcements and Stock Returns: Evidence from the Pakistani Market," Transition Studies Review, Springer;Central Eastern European University Network (CEEUN), vol. 18(2), pages 342-360, December.
    6. Takayasu Ito, 2009. "Fisher Hypothesis in Japan: Analysis of Long-term Interest Rates under Different Monetary Policy Regimes," The World Economy, Wiley Blackwell, vol. 32(7), pages 1019-1035, July.
    7. Rodionova, Alena, 2014. "Formation of long-term rate of return: Fisher effect in the markets of public debt of developing countries," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, pages 116-139.
    8. repec:spr:jecfin:v:41:y:2017:i:2:d:10.1007_s12197-016-9355-9 is not listed on IDEAS
    9. Chen, XiaoHua & Maringer, Dietmar, 2011. "Detecting time-variation in corporate bond index returns: A smooth transition regression model," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 95-103, January.

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