Rational expectations and the Fisher effect: implications of monetary regime shifts
This paper develops a simple rational expectations model of the inflation process that is used to test the Fisher effect. The model emphasizes the link between money and expected inflation, and hence the monetary regime followed by the central bank. The model is estimated with U.S. data over the 1953-1986 period. We find that instability in the observed Fisher effect is associated with monetary regime shifts, and that the forecastability of money under different money regimes is an important determinant of the extent to which the Fisher effect is statistically observable.
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