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The Inverted Fisher Hypothesis; Inflation Forecastability and Asset Substitution"

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  • Woon Gyu Choi

Abstract

This paper examines the implications of inflation persistence for the inverted Fisher hypothesis that nominal interest rates do not adjust to inflation because of a high degree of substitutability between money and bonds. It is emphasized that the substitutability between nominal assets and capital renders the hypothesis inconsistent with the data when inflation persistence is high. Using a switching regression model, the analysis allows the reflection of inflation in interest rates to vary according to the degree of inflation persistence or forecastability. The hypothesis is supported by U.S. data only when inflation forecastability is below a certain threshold.

Suggested Citation

  • Woon Gyu Choi, 2000. "The Inverted Fisher Hypothesis; Inflation Forecastability and Asset Substitution"," IMF Working Papers 00/194, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:00/194
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    Cited by:

    1. Woon Gyu Choi & Yi Wen, 2010. "Dissecting Taylor Rules in a Structural VAR," IMF Working Papers 10/20, International Monetary Fund.
    2. John W. Galbraith & Greg Tkacz, 2007. "How Far Can Forecasting Models Forecast? Forecast Content Horizons for Some Important Macroeconomic Variables," Staff Working Papers 07-1, Bank of Canada.

    More about this item

    Keywords

    Economic forecasting; Economic models; Inflation; Inverted Fisher hypothesis; asset substitution; inflation forecastability; switching regression; threshold effect; nominal interest rate; inflation process; high inflation; inflation rate;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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