The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect
This paper critically re-examines theory and evidence on the relation- ship between interest rates and inflation. It concludes that there is no evidence that interest rates respond to inflation in the way that classical or Keynesian theories suggest, For the period 1860-1940, it does not appear that inflationary expectations had any significant impact on rates of inflation in the short or long run. During the post-war period interest rates do appear to be affected by inflation. However, the effect is much smaller than any theory which recognizes tax effects would predict. Further- more, all the power in the inflation interest rate relationship comes from the 1965-1971 period. Within the 1950's or 1970's, the relationship is both statistically and substantively insignificant. Various explanations for the failure of the theoretically predicted relationship to hold are considered. The relationship between inflation and interest rates remains weak at the even low frequencies. This is taken as evidence that cyclical factors or errors in measuring inflation expectations cannot account for the failure of the results to bear out Fisher's theoretical prediction. Rather, comparison of real interest rates and stock market yields suggests that Fisher was correct in pointing to money illusion as the cause of the imperfect adjustment of interest rates to expected inflation.
|Date of creation:||Jan 1982|
|Date of revision:|
|Publication status:||published as Summers, Lawrence H. "The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect." A Synbosium in Honor of Arthur Okun, edited by James Tobin, pp. 201-241. Washington: Brookings Institution, 1983.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Ibbotson, Roger G & Sinquefield, Rex A, 1976. "Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns (1926-1974)," The Journal of Business, University of Chicago Press, vol. 49(1), pages 11-47, January.
- William P. Yohe & Denis S. Karnosky, 1969. "Interest rates and price level changes, 1952-69," Review, Federal Reserve Bank of St. Louis, issue December, pages 18-38.
- Mishkin, Frederic S., 1981.
"The real interest rate: An empirical investigation,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 15(1), pages 151-200, January.
- Frederic S. Mishkin, 1981. "The Real Interest Rate: An Empirical Investigation," NBER Working Papers 0622, National Bureau of Economic Research, Inc.
- Martin Feldstein & Lawrence Summers, 1978.
"Inflation, Tax Rules, and the Long Term-Interest Rate,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 9(1), pages 61-110.
- Martin Feldstein & Lawrence Summers, 1983. "Inflation, Tax Rules, and the Long-term Interest Rate," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 153-185 National Bureau of Economic Research, Inc.
- Martin Feldstein & Lawrence H. Summers, 1979. "Inflation, Tax Rules, and the Long Term Interest Rates," NBER Working Papers 0232, National Bureau of Economic Research, Inc.
- Shiller, Robert J & Siegel, Jeremy J, 1977. "The Gibson Paradox and Historical Movements in Real Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 891-907, October.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0836. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.