The Fisher effect: new evidence and implications

Using monthly data in the 1980s and early 1990s, our results do not support the short-run Fisher effect since short-term interest rates are associated with negligible changes in expected inflation. However, inflation and nominal interest rates exhibit common stochastic trends in the long run. Consequently, the correlation between nominal interest rates and inflation rates increases with maturity until they move in a one-to-one relation at long horizon. This is evident by the correlation coefficients of the Johansen test for cointegration that increase with the maturity of US government securities from 2 to 5 years.     

Neo‐Fisherism and inflation control

According to conventional central banking wisdom, an inflation‐targeting central bank should increase (decrease) its nominal interest rate target when inflation is above (below) its target. According to neo‐Fisherites, conventional central bankers have the sign wrong. Essentially all mainstream macroeconomic models tell us that increases in nominal interest rates increase inflation—in the short run and in the long run. This paper reviews neo‐Fisherian theory and evidence and addresses issues relating to inflation control in low real interest rate environments.     

Optimal monetary rules: the case of Brazil

Within a dynamic programming approach, an optimal rule for the central bank to attain its inflation targeting goals is derived. The short-run nominal interest rate is used as an instrument to achieve monetary objectives. The model is tested for the Brazilian economy and compared with results found for other countries. Evidence for the estimated feedback interest rule for the Central Bank suggests that the cost of reducing inflation in an open economy is lower than that of a closed economy.     

Fiscal policy,government debt,and economic growth in the Kaleckian model of growth and distribution

This article presents the Kaleckian model of growth and distribution that sets a budget deficit ratio as an indicator of fiscal policy and examines the short- and long-run effects of an increase in budget deficits and a rise in income tax rates on the economy. The key short-run outcomes are as follows. First, expanded budget deficits have a positive effect on the rate of capacity utilization. Second, the tax rate for wage income does not affect the rate of capacity utilization, whereas the tax rate for capital income has a favorable impact on it. This result implies that raising the tax rate for capital income can be an important policy instrument for stimulating the economy. Third, we find that the economy exhibits a wage-led aggregate demand in the short run. The main long-run results are as follows. First, the effect of expanded budget deficits on the growth rate is ambiguous, since a higher debt burden negatively influences the rate of capacity utilization and hence economic growth, despite the increase in demand caused by government borrowing. A higher budget deficit ratio thus raises the growth rate only if a certain condition is satisfied. Second, the tax rate for capital income has a positive impact on the growth rate. Third, the economy shows a wage-led growth in the long run.     

What keeps long-term U.S. interest rates so low?

U.S. government indebtedness and fiscal deficits increased notably following the Global Financial Crisis. Yet long-term interest rates and U.S. Treasury yields have remained remarkably low. What keeps long-term interest rates so low? This paper relies on a simple model, based on John Maynard Keynes’ view that the central bank's actions are the key drivers of long-term interest rates, to explain the behavior of long-term interest rates in the U.S. The empirical findings confirm that short-term interest rates are the most important determinants of long-term interest rates in the U.S. Contrary to conventional wisdom, higher government indebtedness has a negative effect on long-term interest rates, particularly on a long run basis. However, in the short run, higher government indebtedness has a positive effect on long-term interest rates. These are relevant for contemporary policy debates and macroeconomic theory.     

Inflation targeting credibility and reputation: The consequences for the interest rate

The measurement of credibility and reputation is fundamental for the analysis of countries which adopted inflation targeting. Under this perspective, the objective of this article is to illustrate which measures of credibility and reputation are most useful in predicting variations of interest rates. Given a specific inflation target, this relationship is valuable for central bankers as well as for private agents trying to predict the central bank's policies. Due to the fact that Brazil represents a potential laboratory experiment in which the effects of an adoption of inflation targeting after more than a half decade can be observed, an analysis through several indices and its relation with the basic interest rate is made. The findings denote that the credibility indices based on reputation represent an alternative in the cases where the series of inflation expectation are not available. Furthermore, the empirical evidence confirms the hypothesis that higher credibility implies lower variations in the interest rate for controlling inflation.     

The effectiveness of monetary policy and output fluctuations: An asymmetric analysis

Previous studies have investigated asymmetries in the effects of monetary policy on the real economic activity by using either vector autoregressive (VAR)-based regime-switching models with smooth transition technique or Gaussian functions to parameterise the dynamic effects of structural shocks on the economy. These kinds of VAR models assume asymmetry as a short-run relationship between the series since the long-run neutrality hypothesis of money states that monetary policy can only affect productive capacity of the economy in the short run, but not in the long run. The recent theoretical literature shows that this hypothesis is not quite right. Thus, this paper examines the extent to which monetary policy has a long-run asymmetric effect on output in a number of Organisation for Economic Co-operation and Development countries by using a nonlinear hidden cointegration analysis within a likelihood-based panel framework. The findings indicate that there is a long-run relationship between the real interest rate as an indicator of monetary policy and the growth rate of real output in five countries out of nine under review. This gives support for the view that output has responded asymmetrically to the real interest rate changes. The economic implication of our results is that monetary policy affects positive and negative output fluctuations differently.     

Inflation dynamics and the cost channel of monetary transmission

Evidence from vector autoregressions indicates that the impact of interest rate shocks on macroeconomic aggregates can substantially be affected by the so-called cost channel of monetary transmission. In this paper, we apply a structural approach to examine the relevance of the cost channel for inflation dynamics in G7 countries. Since firms’ costs of working capital increase with interest rates, we augment a (hybrid) New Keynesian Phillips curve by including the short-run nominal interest rate. We find significant and varying direct interest rate effects for the majority of countries, including member countries of the EMU. Simulations further demonstrate that the estimated interest rate coefficients can substantially affect inflation responses to monetary policy shocks, and can even lead to inverse inflation responses, when the cost channel is - relative to the demand channel - sufficiently strong.     

Long-run investment under uncertain demand

In the literature investigating the impact of uncertainty on short-run and long-run investment, most authors have used a log linear profit function. This functional form has been generally considered a reasonable approximation for a more general one and has the advantage of providing closed form solutions for both short-run investment rule and long-run rate of capital accumulation. In this paper, we consider the profit function for the case of a monopolistic firm facing a linear demand function with additive shocks. Under this assumption, analytical solutions, for both short-run investment rule and long-run rate of capital accumulation, are not available. We then 1) propose an analytical approximation of the short-run investment rule and 2) show how such approximation can be used in order to derive the corresponding i) steady-state distribution of the optimal stock of capital and ii) the long-run average rate of capital accumulation. Finally, we compare the long-run rates of capital accumulation calculated under both profit function specifications. We find that, within a plausible range of parameter values, the two rates are significantly different. Hence, we conclude that the choice of a log linear functional form has a non-trivial impact on the magnitude of the long run rate of capital accumulation.     

An Empirical Examination of the Fisher Effect in Australia*

This paper analyzes the Fisher effect in Australia. Initial testing indicates that both interest rates and inflation contain unit roots. Furthermore, there are indications that the variables have non-standard error processes. To overcome problems associated with this and derive the correct small sample distributions of test statistics we make use of Monte Carlo simulations. These tests indicate that while a long-run Fisher effect seems to exist, there is no evidence of a short-run Fisher effect. This suggests that, while short-run changes in interest rates reflect changes in monetary policy, longer run levels indicate inflationary expectations. Thus, the longer run level of interest rates should not be used to characterize the stance of monetary policy.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

On the Transmission Mechanism of Monetary Constraints to the Real Side of the Economy

Contrary to the predictions of the theory underlying international finance, inflows of capital triggered by financial liberalisation have neither equalised real interest rates nor increased income growth in many emerging economies. We explain this puzzle by developing a model that combines the balance‐of‐payments constraint approach to economic growth with a less stringent version of the real interest rate parity hypothesis. The model’s foundations are based on robust empirical findings or well‐established macroeconomic models. We show that a perverse combination of income elasticities of demand for imports and exports generates slow income growth and high real interest rates. As domestic income grows and imports rise faster than exports, the real exchange rate is expected to depreciate in order to clear the balance of payments (or the foreign exchange rate market). An incipient capital outflow arises and interest rates increase. Faster adjustment in capital rather than in the goods market therefore generates a higher real interest rate differential between the domestic small open‐economy and the rest of the world. The long run analysis shows that a constant degree of risk aversion implies a positive equilibrium real interest rate differential that affects economic growth. A permanent increase in default risk driven by persistent current account imbalances thus impacts on long run growth. The model’s results are illustrated with evidence from the three major Latin America economies: Argentina, Brazil and Mexico.     

Currency devaluations,aggregate demand,and debt dynamics in economies with foreign currency liabilities

The article uses a post Kaleckian model to analyze how currency devaluations affect aggregate demand and capital accumulation in an economy with foreign currency liabilities in the short-run. In benchmark post Kaleckian open economy models, currency devaluations have two effects. First, they change international price competitiveness and thus affect net exports. Second, devaluations change income distribution and thereby affect consumption and investment demand. The overall effect on aggregate demand and investment is ambiguous and depends on parameter values. Existing models, however, disregard balance sheet effects that arise from foreign currency-denominated external debt. The article develops a novel post Kaleckian open economy model that introduces foreign currency-denominated external debt and balance sheet effects to examine the demand-effects of devaluations. Furthermore, the article models the dynamics of external and domestic corporate debt. It discusses how an economy may end up in a vicious cycle of foreign-currency indebtedness and derives the conditions under which indebtedness becomes stable or unstable. It shows that the existence of foreign currency-denominated debt means that contractionary devaluations are more likely, and that foreign interest rate hikes, and high illiquidity and risk premia compromise debt sustainability. Devaluations only stabilize debt ratios if they succeed in boosting domestic capital accumulation.     

The inflationary bias of real uncertainty and the harmonic Fisher equation

Summary. We argue that real uncertainty itself causes long-run nominal inflation. Consider an infinite horizon cash-in-advance economy with a representative agent and real uncertainty, modeled by independent, identically distributed endowments. Suppose the central bank fixes the nominal rate of interest. We show that the equilibrium long-run rate of inflation is strictly higher, on almost every path of endowment realizations, than it would be if the endowments were constant.Indeed, we present an explicit formula for the long-run rate of inflation, based on the famous Fisher equation. The Fisher equation says the short-run rate of inflation should equal the nominal rate of interest less the real rate of interest. The long-run Fisher equation for our stochastic economy is similar, but with the rate of inflation replaced by the harmonic mean of the growth rate of money.Received: 25 February 2005, Revised: 26 May 2005, JEL Classification Numbers: C7, C73, D81, E41, E58.An earlier version of this paper “Inflationary Bias in a Simple Stochastic Economy,” as a 2001 Cowles Foundation Discussion Paper No. 1333.     

中国经济转型与货币需求

本文采用"从一般到特殊"的动态建模方法对中国经济转型过程中的货币需求函数进行了再估计,通过引入市场化进程相对指数作为衡量经济转型的制度变量考察货币需求、经济增长、通货膨胀、利率和经济转型之间的相互关系。结果发现,尽管1978—2007年间30年的改革开放使得中国的经济体制和金融体系发生了较大的转型,但通过引入适当的制度变量,仍然可以得到稳定的货币需求函数。本文建立的货币需求动态模型证实了经济体制的市场化转型无论长短期都是拉动货币需求增加的因素,通货膨胀是解释货币量的有效外生解释变量,短期内利率变量对实际货币需求影响不显著,但其确实显著地进入了长期货币需求关系。     

人民币汇率、资产价格与短期国际资本流动

本文基于1999年1月～2008年6月的月度数据,运用ARDL-ECM模型检验了人民币汇率、资产价格与我国短期国际资本流动的关系。结果表明,长期内,人民币汇率预期变化率和国内外利差是影响短期国际资本流动的显著因素,人民币汇率水平、国内股市收益率和房地产收益率并未对短期国际资本流动产生显著影响;短期内,人民币汇率、国内外利差和房地产收益率对短期国际资本流动有显著的滞后效应。     

Working time and labour demand in Finnish manufacturing: short-run and long-run effects

The effect of changes in the standard working time on employment and average hours is studied using pooled data from five Finnish manufacturing industries. The model is an error correction model, which makes it possible to separate short-run, reductions in standard hours increase employment. There is evidence that the long run effect of working time on employment has changed over time. In the 1970s reductions in hours have had positive long-run employment effects, but in the 1980s the positive short-run impact has been neutralized in the long run. Changes in standard hours do not influence the utilization rate of labour, which is defined as the ratio of overtime hours to standard hours. In the short run, the utilization rate is influenced by output changes.     

Malaysia-Japan Commodity Trade and Asymmetric Effects of Exchange Rate Changes

Asymmetry analysis is a new norm in applied research and the link between the trade balance and the exchange rate is no exception. In this paper we investigate the asymmetric response of the trade balance of each of the 60 industries that trade between Malaysia and Japan. We find short-run asymmetric effects of exchange rate changes on the trade balance of 50 industries (including the two largest industries), short-run adjustment asymmetry in 47 industries, and short-run impact asymmetry in 30 industries. However, short-run asymmetric effects lasted into the long run only in limited number of industries. Results are industry-specific at best.     

Long run determinants and short run dynamics of inflation in Tunisia

The essential idea of this study is to analyse the origins of inflation at short and long runs in Tunisia relying on annual data during the period 1962 to 2003. We also suggest a model that has a structure determined by monetary and structural factors, and estimated by Johansen's cointegration technique. The empirical results show that inflation is explained by mixed factors: monetary ones such as money supply, the interest rate and the real effective exchange rate; and structural ones like the nominal average annual wage rate, the import prices and the real output. The analysis aims at pointing out the long run determinants of inflation and studying its short run dynamics.