The Fisher hypothesis: a multi-country analysis

This paper tests whether the Fisher hypothesis holds for a sample of 26 countries by assessing the long run relationship between nominal interest rates and inflation rates taking into consideration the short run dynamics of interest rates. The empirical evidence supports the hypothesis that there is a one-to-one relationship between the interest rate and inflation for more than half of the countries under study.     

The effects of inflation uncertainty on interest rates: a nonlinear approach

In this article, we investigate the effects of inflation variability on short-term interest rates within a nonlinear smooth transition regression framework. The test results suggest that only the conditional mean of the inflation is a nonlinear process whereas the conditional variance is time variant but linear. Using the square root of conditional variance as a proxy for inflation risk, we estimate Fisher equation augmented with inflation risk. Although the estimated Fisher equations suggest that inflation risk reduces short-term interest rates, we find that the effects of inflation risk on interest rates are regime-dependent. Particularly, we find that the negative effects of inflation variability on nominal rates are greater in low-inflationary regimes when compared to high-inflationary regimes. On the other hand, it is found that both inflation and inflation uncertainty raise the expected inflation effect.     

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.     

An examination of the Fisher Hypothesis: the case of Turkey

This study examines the famous Fisher Hypothesis (FH) for Turkey. FH asserts that nominal interest rates adjust on a one-to-one basis to expected changes in inflation rates. Using the Johansen cointegration method for the Turkish monthly interest rate and inflation rate data, we find that it is possible to determine the long-run relationship—but not the one-to-one basis—between nominal interest rates and inflation. Our findings suggest that full FH does not hold but there is a very powerfull Fisher effect in the case of Turkey from 1990 to 2003.     

A panel analysis of the fisher effect with an unobserved I(1) world real interest rate

The Fisher effect states that inflation expectations should be reflected in nominal interest rates in a one-for-one manner to compensate for changes in the purchasing power of money. Despite its wide acceptance in theory, much of the empirical work fails to find favorable evidence. This paper examines the Fisher effect in a panel of 21 OECD countries over the period 1983–2010. Using the Panel Analysis of Non-stationarity in Idiosyncratic and Common Components (PANIC), a non-stationary common factor is detected in the real interest rate. This may reflect permanent common shifts in e.g. time preferences, risk aversion and the steady-state growth rate of technological change. We therefore control for an unobserved non-stationary common factor in estimating the Fisher equation using both the Common Correlated Effects Pooled (CCEP) and the Continuously Updated (Cup) estimation approach. The impact of inflation on the nominal interest rate is found to be insignificantly different from 1, providing support of the Fisher effect.     

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.     

The process of technical change in UK manufacturing

This paper tests the validity of the Fisher hypothesis, which establishes a positive relation between interest rates and expected inflation, for the G7 countries and 45 developing economies. For this purpose, we estimate a version of the GARCH specification of the hypothesis for all countries included in the sample. We also test the augmented Fisher relation by including the inflation uncertainty in the equation. The simple Fisher relation holds in all G7 countries but in only 23 developing countries. There is a positive and statistically significant relationship between interest rates and inflation uncertainty for six of the G7 and 18 of the developing countries and this relationship is negative for seven developing countries.     

Robust estimation and inflation forecasting

This paper considers various models emerging from the Fisher effect and/or the term structure of interest rates for inflation forecasting. This paper, it is believed, makes a contribution to the literature on estimation of the models by using a procedure that is robust for non-normal errors, improving the efficiency of the estimates considerably. The Consumer Price Index series, 90 days and 180 days Australian bank-accepted bill rates, covering the sample period 1968Q1 to 1998Q4 were used in this study. Contrary to earlier findings, strong evidence was documented supporting the Fisher effect in the presence of a structural break with the break-point being at 1980Q1. The overall results suggest that the error correction model of the Fisher effect, the term structure of interest rates and short-run dynamics produce superior forecasts, in particular when the models were estimated using the robust method. These findings have important implications for economic policy analysis.     

A note on the specification of the fisher equation under inflation uncertainty

The effect of uncertainty on the relationship between the nominal interest rate and the expected rate of inflation, the Fisher equation, is examined both theoretically and empirically. It is found that the coefficient of the expected rate of inflation is significantly below unity. Variable rates of inflation tend to effect the nominal rate of interest positively, but real yields are apparently effected only by expected inflation, but not its variance.     

The Fisher effect,survey data and time-varying volatility

In this paper we study the Fisher hypothesis using Livingston survey data on inflation expectations. We propose a simple model for the ex-ante real interest rate where the standard deviation of survey forecasts is used to correct for heteroskedasticity. The findings of this paper contradict earlier studies. We find supportive evidence for the Fisher hypothesis that the nominal interest rate and expected inflation move one-for-one both in the short and the long run. Our results also suggest that the change of US monetary policy does not have significant effect on the dynamics of the ex-ante real interest rate such as previous work assumes.     

Monetary deregulation and inverting the inverted fisher effect

We find evidence that deregulation allowing interest payments on checkable deposits decreased (increased) the sensitivity of the real (nominal) rate of interest to expected inflation. Our results provide further confirmation of the Inverted Fisher Effect.     

Cross-Country Evidence on the Ability of the Nominal Interest Rate to Predict Inflation

This paper examines the viability of using short-term interest rates to forecast inflation as implied by the Fisher hypothesis. A major problem with this approach lies in the implicit assumptions that the real interest rate is constant and that the relationship between inflation and interest rate does not change over time. We demonstrate, using quarterly data for four OECD countries, that by relaxing these assumptions and allowing for seasonality in the inflation rate it is possible to obtain a model with a high degree of forecasting accuracy and efficiency.
JEL Classification Numbers: C22, C52, E31.     

市场结构反转下之费雪效应研究

本文主要目的系考量结构改变风险下,对台湾地区费雪效果之再检验。模型的使用选择ZivotandAd-rews(1992)对ADF单根检定之修正模型(简称Z&A修正模型)。该模型的优点,在于允许结构断裂点(break-point)由资料特性内生(endogenizing)决定,而非研究者主观判断。过去文献指出,检验费雪效果之结果,与选用之时间序列资料之定态与否有高度相关,因此本研究使用修正后之Z&A修正模型,更严密的检视资料分析过程之前置检验阶段,将有助于后续分析获得较精确之推论结果。Z&A修正模型发现名目利率、通货膨涨率之水平项即为定态序列,在修正冲击(shock)对序列的长期影响后,两总体变数在长期间是相当稳定的。而其进一步向量自我回归分析结果,显示台湾地区之费雪效果在此一期间并无法被支持。     

The Impact of Inflation Uncertainty on Interest Rates in the UK

This paper assesses the effect of expected inflation and inflation risk on interest rates within the Fisher hypothesis framework. Autoregressive Conditional Heteroscedastic models are used to estimate the conditional variability of inflation as a proxy for risk. With the UK quarterly data from 1958:4 to 1994:4, we found that both the expected inflation and the conditional variability of inflation positively affect the UK three‐month Treasury‐bill rate.     

Inflation and interest rates: Some time series evidence from 6 OECD countries

This study examines the time series properties of inflation and interest rates variables using monthly data from 6 OECD countries covering the period 1972.1–1984.8. The analysis focuses on the hypotheses that real rates of interest are constant over time and that movements in nomial rates can be explained by inflation only. These hypotheses are tested by applying both formal and informal test procedures and by carrying out tests both in the time and in the frequency domain. On the whole, the empirical evidence is at variance with these hypotheses. Only in the case of the United States do the results lend some support for the existence of the Fisher relationship.     

Budget deficits,short-term real interest rates and the specification of expected inflation: an empirical investigation

The purpose of this paper is to illustrate whether empirical estimates of the effects of budget deficits on short-term real interest rates are sensitive to the choice of the expected inflation variable. Survey data on expected inflation and the rational expectations method described by Mishkin (1981) are used to construct two measures of the short-term real interest rate. Results for two previous studies on this deficit-interest rate relationship are re-estimated using these measures of expected inflation and the interest rate variables. Additional results reported in this paper further indicate that empirical estimates of the interest rate effects of budget deficits are sensitive to the choice of the expected inflation variable. In addition to the choice of the inflation variable, a number of other robustness tests are included. We are able to conclude that (1) increases in budget deficits do not generally raise short-term real interest rates and (2) short-term real interest rates are not independent of the expected inflation variable.

The rate of interest is always based upon expectation, however little this may be justified by realization. Man makes his guess of the future and stakes his action upon it … Our present acts must be controlled by the future, not as it actually is, but as it appears to us through the veil of chance (Fisher, 1907, p. 213).     

The Relationship between Interest Rates and Inflation: Examining the Fisher Effect in China

This study revisits the Fisher effect using a different empirical method that considers a potential nonlinear relationship between interest rates (treasury bond rates) and inflation in China. The rising uncertainty and asymmetric information in financial markets between bond holders and bond issuers suggest such a potential nonlinear relationship. To this aim, we apply Shin et al.’s (2014) nonlinear autoregressive distributed lag (NARDL) model with asymmetric dynamic multipliers for the sample period 2002M7–2018M4. The empirical findings reveal symmetric and asymmetric partial Fisher effects for all sample bond rates in China. Furthermore, we find that 20-year bond rates experience the lowest partial Fisher effect.     

The relationship between interest rates and inflation during the prewar period: Some empirical evidence

This study examines the relationship between interest rates and inflation during the prewar period. The results of all empirical analyses are clearly at variance with the Fisher hypothesis while supporting the ‘inverted Fisher hypothesis’ proposed by Carmichael and Stebbing (1983). This result gives rise to some serious doubts on the overall performance of the former hypothesis.     

Interest rates and the fisher effect in India: An empirical study

This study throws light on the importance of adjustment lags, variability of inflation, changes in real income, etc. in the empirical estimation of Fisher hypothesis. Variability of inflation has a significant negative impact on both short- and long-term interest rates in a developing economy like India. The ‘Philips Curve Effect’ has not been operative in a developing country.     

“Ex-ante” Taylor rules and expectation forming in emerging markets

The success of monetary policy in stabilizing inflation depends substantially on its influence on expectation formation of private agents. This paper provides a novel perspective on the expectation forming process of financial markets. Using forecasts for the short-term interest rate, the inflation rate, and output growth for 10 emerging markets in Latin-America, central and eastern Europe, we estimate expected (“ex-ante”) Taylor-type rules. We find evidence for significant differences in the expectation formation process in the sense that the well-known Taylor principle fairly holds for only some countries, while for the other countries it does not. The adaption of an explicit inflation targeting regime seems to explain this cross-country differences.