The Fisher Equation Controversy: A Reconciliation of Contradictory Results
This paper re-examines the alternative theoretical predictions in the Fischer equation literature. Theoretical predictions about the response of nominal interest rates to inflation expectations ranges from a partial to complete and more-than-complete adjustment of the nominal interest rate to anticipated inflation. Using a neoclassical monetary growth model, this study demonstrates how Mundell-Tobin, Fischer, Darby-Feldstein, Neilsen-Gandolfi, and Summers effects hold as special cases under specific assumptions about the parameter values of the model; thus suggesting that the magnitude of the response of the nominal interest rate to expected inflation depends on the empirical values of the critical parameters involved.
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