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Long-term evidence on the Tobin and Fisher effects: a new approach

  • Shaghil Ahmed
  • John H. Rogers

Using a new approach, we reexamine the empirical evidence on the long-term interactions between inflation and real variables. We find, using over 100 years of U.S. data, that in the long run the effect of inflation on investment and output is positive (a "Tobin type effect") and the investment rate, and hence the real interest rate, are not independent of inflation. However, over the full sample at least, the variability of the innovations to the stochastic inflation trend is small relative to the variability of the innovations to the productivity and fiscal trends. We conclude that models generating a reverse-Tobin effect, including standard real-business-cycle and endogenous growth models that incorporate money, may not be the best models for understanding the long-term real effects of inflation.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 566.

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Date of creation: 1996
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Handle: RePEc:fip:fedgif:566
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