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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. 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.
  2. Nathan S. Balke & Kenneth M. Emery, 1994. "Understanding the price puzzle," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 15-26.
  3. Giordani, Paolo, 2004. "An alternative explanation of the price puzzle," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1271-1296, September.
  4. Frederic S. Mishkin, 1991. "Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates," NBER Working Papers 3632, National Bureau of Economic Research, Inc.
  5. K. M. Hawtrey, 1997. "The Fisher effect and Australian interest rates," Applied Financial Economics, Taylor & Francis Journals, vol. 7(4), pages 337-346.
  6. Frederic S. Mishkin & John Simon, 1994. "An Empirical Examination of the Fisher Effect in Australia," RBA Research Discussion Papers rdp9410, Reserve Bank of Australia.
  7. James Payne & Bradley Ewing, 1997. "Evidence from lesser developed countries on the Fisher hypothesis: a cointegration analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 4(11), pages 683-687.
  8. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  9. 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.
  10. 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.
  11. Tanzi, Vito, 1980. "Inflationary Expectations, Economic Activity, Taxes, and Interest Rates," American Economic Review, American Economic Association, vol. 70(1), pages 12-21, March.
  12. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
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