New Hope for the Fisher Effect? A Re-Examination Using Threshold Cointegration
This paper reassesses the long-run relation between nominal interest rates and inflation using German data. It shows that the empirical rejection of the strict Fisher effect in previous studies, i.e., the finding of interest rates not fully adjusting to changes in inflation, can be attributed to the particular time series behavior of inflation and interest rates which cannot be accounted for by standard non- stationary models. It is argued that the stochastic process governing the bivariate system of inflation and interest rates depends on the level of the variables and should be modeled as a thresh-old cointegration (TC) model. Contrary to the unit root hypothesis this model can be given an economic interpretation in terms of the opportunistic approach to disinfla-tion. The full Fisher effect, even in its tax-adjusted form, cannot be rejected when a threshold cointegration model is estimated. The TC model not only explains the downward bias of the coefficient estimates, but also the sample and country sensitivity observed in previous studies. The TC model may prove useful in testing other long-run relations such as uncovered interest rate parity or purchasing power parity.
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.:
- Feldstein, Martin S, 1976.
"Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis,"
American Economic Review,
American Economic Association, vol. 66(5), pages 809-20, December.
- Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
- Frederic S. Mishkin, 1982.
"The Real Interest Rate: A Multi-Country Empirical Study,"
NBER Working Papers
1047, National Bureau of Economic Research, Inc.
- Frederic S. Mishkin, 1984. "The Real Interest Rate: A Multi-Country Empirical Study," Canadian Journal of Economics, Canadian Economics Association, vol. 17(2), pages 283-311, May.
- Nathan S. Balke & Thomas B. Fomby, 1992.
9209, Federal Reserve Bank of Dallas.
- Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- 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.
- Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
- Kate Phylaktis & David Blake, 1993. "The fisher hypothesis: Evidence from three high inflation economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 129(3), pages 591-599, September.
- Frederic S. Mishkin, 1991.
"Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates,"
NBER Working Papers
3632, National Bureau of Economic Research, Inc.
- Mishkin, Frederic S., 1992. "Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 195-215, November.
- Evans, Martin D D & Lewis, Karen K, 1995.
" Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?,"
Journal of Finance,
American Finance Association, vol. 50(1), pages 225-53, March.
- Martin D.D. Evans & Karen K. Lewis, 1993. "Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Working Papers 93-06, New York University, Leonard N. Stern School of Business, Department of Economics.
- Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
- Robert B. Barsky, 1986.
"The Fisher Hypothesis and the Forecastability and Persistence of Inflation,"
NBER Working Papers
1927, National Bureau of Economic Research, Inc.
- Barsky, Robert B., 1987. "The Fisher hypothesis and the forecastability and persistence of inflation," Journal of Monetary Economics, Elsevier, vol. 19(1), pages 3-24, January.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Lawrence H. Summers, 1982. "The Nonadjustment of Nominal Interest Rates: A Study of the Fisher Effect," NBER Working Papers 0836, National Bureau of Economic Research, Inc.
- Orphanides, Athanasios & Wilcox, David W, 2002.
"The Opportunistic Approach to Disinflation,"
Wiley Blackwell, vol. 5(1), pages 47-71, Spring.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Pippenger, Michael K & Goering, Gregory E, 1993. "A Note on the Empirical Power of Unit Root Tests under Threshold Processes," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(4), pages 473-81, November.
- Wallace, Myles S & Warner, John T, 1993. "The Fisher Effect and the Term Structure of Interest Rates: Tests of Cointegration," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 320-24, May.
- Peter C.B. Phillips & Pierre Perron, 1986.
"Testing for a Unit Root in Time Series Regression,"
Cowles Foundation Discussion Papers
795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
- Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche 8633, Universite de Montreal, Departement de sciences economiques.
- Tom Doan, . "PPUNIT: RATS procedure to perform Phillips-Perron Unit Root test," Statistical Software Components RTS00160, Boston College Department of Economics.
- 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.
- Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-18, February.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9705005. 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: (EconWPA)
If references are entirely missing, you can add them using this form.