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An Empirical Study Of The Fisher Effect And The Dynamic Relation Between Nominal Interest Rate And Inflation In Singapore

  • KING FUEI LEE

    ()

    (Schroder Investment Management, 65 Chulia Street, #46-00 OCBC Centre, Singapore 049513, Singapore)

The Fisher Effect postulated that real interest rate is constant, and that nominal interest rate and expected inflation move one-for-one together. This paper employs Johansen's method to investigate for the existence of a long-run Fisher effect in the Singapore economy over the period 1976 to 2006, and finds evidence of a positive relationship between nominal interest rate and inflation rate while rejecting the notion of a full Fisher Effect. The dynamic relationship between nominal interest rate and inflation rate is also examined from the error-correction models derived, and the analysis is extended to investigate the impulse response functions of inflation and nominal interest rates where we discover the presence of the Price Puzzle in the Singapore market.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal The Singapore Economic Review.

Volume (Year): 54 (2009)
Issue (Month): 01 ()
Pages: 75-88

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Handle: RePEc:wsi:serxxx:v:54:y:2009:i:01:p:75-88
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  1. Giordani, Paolo, 2000. "An alternative explanation of the price puzzle," SSE/EFI Working Paper Series in Economics and Finance 414, Stockholm School of Economics, revised 06 Dec 2000.
  2. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 266-76, June.
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  8. Mishkin, Frederic S & Simon, John, 1995. "An Empirical Examination of the Fisher Effect in Australia," The Economic Record, The Economic Society of Australia, vol. 71(214), pages 217-29, September.
  9. K. M. Hawtrey, 1997. "The Fisher effect and Australian interest rates," Applied Financial Economics, Taylor & Francis Journals, vol. 7(4), pages 337-346.
  10. 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.
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