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Changes in Regime and the Long Run Fisher Effect: a Threshold Cointegration Analysis

Author

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  • Henry, O.T.

Abstract

The Fisher equation predicts that nominal interest rates and inflation should move together one-for-one. Recently published work argues that both nominal interest rates and inflation are non-linear. The evidence in this paper suggests that nominal interest rates are well described as two-regime threshold unit root processes. However, inflation and real interest rates appear to be stationary threshold processes. This is consistent with a threshold processes. This is consistent with a threshold cointegrating relationship between nominal interest rates and inflation. The long run Fisher equation describes the relationship between real interest rate inflation in periods of high inflation. In the low inflation regime shocks to real interest rates are highly persistent.

Suggested Citation

  • Henry, O.T., 1999. "Changes in Regime and the Long Run Fisher Effect: a Threshold Cointegration Analysis," Department of Economics - Working Papers Series 720, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:720
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    Cited by:

    1. Nicolas Million, 2006. "Changements de régime pour la persistance et la dynamique du taux d'intérêt réel américain," Cahiers de la Maison des Sciences Economiques v06067, Université Panthéon-Sorbonne (Paris 1).

    More about this item

    Keywords

    INTEREST RATE ; MACROECONOMICS ; ECONOMIC THEORY;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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