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.     

Real and nominal UK interest rates,ERM membership,and inflation targeting

This article estimates a two-factor term structure model to analyze the time-varying mean-reverting levels of the UK real and nominal short-term interest rates. Before and during British membership in the ERM, the mean-reverting levels of real and nominal short rates have a strong negative correlation. Afterward, when the UK implemented an inflation targeting policy, the mean-reverting levels have a strong positive correlation. The article also reports empirical evidence of a link between the time-varying central tendencies and inflation in the disinflation period before the implementation of the inflation targeting policy.     

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.     

Monetary Policy, Nominal Interest Rates, and Long–Horizon Inflation Uncertainty

Empirical evidence presented in this paper shows that the predictability of inflation at long horizons varies considerably across countries. Both simple theory and empirical evidence suggest that the crucial factor is the extent to which systematic monetary policy succeeds in preventing a unit root in inflation. The mechanism by which it does this appears however to be complicated by strong empirical evidence that nominal as well as real interest rates have real effects, which implies that monetary policy need not be so vigorous in reactions to inflation. This helps to explain why inflation rates in the US and (especially) Germany have been relatively predictable, despite monetary policy rules which appear to have been barely stabilising. The paper also presents tentative evidence that the power of nominal interest rate effects is inversely related to long–horizon inflation uncertainty, and hence ultimately uncertainty about monetary policy.     

Inflation and real short-term interest rates - A Kalman filter analysis of the term structure

This paper applies the Kalman filter technique to look at the relationship among real interest rates, inflation, and the term structure of interest rate under the expectations hypothesis. Using quarterly data from 1960:1 to 1991:1 for inflation, three month nominal short term interest rates and long term yields with maturities from one to five years, this paper finds that the expectations hypothesis of the term structure holds up well for the data under the assumptions of a time-varying premium and a random-walk real interest rate. In other words, a reconciliation of the expectations hypothesis with the data is attained by assuming time-varying term premium and non-stationary real interest rate.     

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.     

Index-linked bonds from an academic,market and policy-making standpoint

The view put forward in this paper is that the index-linking of long-term public debt today represents a financial instrument thatfostersa low average rate of inflation. In particular, bonds that are fully linked to the prices of a representative basket of goods and services permit a reduction in the inflation risk premium, which weighs significantly on the nominal cost of the public debt and,ex post, gives rise to substantial real costs that distort the mechanisms of allocation and distribution and, ultimately, could lead to the debt becoming unsustainable. After re-examining the reasons for the “orthodox ” aversion to index-linking —notably on the part of the monetary authorities of the more stable countries and especially the Bundesbank —the case is put for the leading industrial countries, and notably Italy, to issue index-linked government bonds. By issuing such bonds, the Treasuries of the various countries would send a strong stabilizing signal to the markets because recourse to the inflation tax in the future would no longer be advantageous, reduce the real cost of government borrowing by eliminating the inflation risk premium that currently has to be paid on issues with fixed nominal interest rates, benefit from the positive correlation between the quality of revenue and expenditure, and obtain valuable information on forward inflation rates and the real interest rates implicit in the prices of the bonds. The long-term real interest rate offered by index-linked bonds would act as a sort of “lighthouse ” set up by the monetary authorities to illuminate the path of economic growth and enable operators and markets to co-ordinate their actions more effectively.     

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 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.     

Convergence in Interest Rates and Inflation Rates Across Countries and Over Time

We examine the relationship between interest rates and inflation rates for 10 countries during the period 1974–95. We find evidence of a unique cointegrating relationship between nominal interest rates of European Monetary System (EMS) countries, the US and Canada, and the US, Germany, and Japan. No similar relationship is obtained between inflation rates with one exception, namely, that between the US and Canada. We interpret these results as convergence in inflation but not in interst rates. Hence, if interest rates represent an indicator of monetary policy, the countries considered have attempted to implement independent policies but not to an extent which produced divergent trends in inflation.     

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。     

Modifying Taylor reaction functions in the presence of the zero‐lower‐bound — Evidence for the ECB and the Fed

We propose an alternative way of estimating Taylor reaction functions if the zero‐lower bound on nominal interest rates is binding. This approach relies on tackling the real rather than the nominal interest rate. So if the nominal rate is (close to) zero central banks can influence the inflation expectations via quantitative easing. The unobservable inflation expectations are estimated with a state‐space model that additionally generates a time varying series for the equilibrium real interest rate and the potential output — both needed for estimations of Taylor reaction functions. We test our approach for the ECB and the Fed within the recent crisis. We add other explanatory variables to this modified Taylor reaction function and show that there are substantial differences between the estimated reaction coefficients in the pre‐ and crisis era for both central banks. While the central banks on both sides of the Atlantic act less inertially, put a smaller weight on the inflation gap, money growth and the risk spread, the response to asset price inflation becomes more pronounced during the crisis. However, the central banks diverge in their response to the output gap and credit growth.     

Term Spreads,Forward Rates and Yield Curve Forecasts

The expectations hypothesis contends that long rates should equal expected forthcoming average short rates. The spread between long and short rates should therefore forecast changes in short rates. In addition, forward rates should anticipate future spot rates. We present econometric evidence for the Euro area in the period from September 2004 to August 2018. In our sample, term spreads are negatively correlated to subsequent interest rate changes. The difference between forward and spot rates is conversely positively correlated to ensuing spot rate changes. Further regression analysis shows, that nominal interest rates do not have predictive properties for future inflation. A vector autoregression analysis whilst revealing medium term overconfidence of Euro area investors, suggests that the propositions of the expectations hypothesis should hold over relatively long periods of time.     

Nominal Interest Rates as Indicators of Inflation Expectations

The properties of nominal interest rates as indicators of inflation expectations are evaluated. Are they unbiased? How precise are they? To arrive at robust results, a range of different methods are applied on several US and UK data sets. The results show that the interest rate level is a reasonably good indicator of the level of inflation expectations. However, changes in interest rates are poor indicators of changes inflation expectations.     

US stock market sensitivity to interest and inflation rates: a quantile regression approach

This article studies the sensitivity of the US stock market to nominal and real interest rates and inflation during the 2003–2013 period using quantile regression (QR). The empirical results show that the stock market has a significant sensitivity to changes in interest rates and inflation and finds differences across sectors and over time. Moreover, the effect of changes in both interest rates and inflation tends to be more pronounced during extreme market conditions, thus distinguishing expansion periods from recession periods.     

The roles of relative prices,interest rates,and bequests in the consumption function

This paper investigates the roles of relative prices, interest rates, inflation expectations and bequests in the determination of consumer expenditures for four goods in the U.S. The framework employed is a life-cycle extension of the Linear Expenditure System, in which relative prices, wealth, labor income, the nominal interest rate, and anticipated rates of inflation for each good are major arguments. The results provide strong empirical support for the expenditure system employed and suggest a significant role for relative prices and for the bequest motive in shaping saving decisions. We also find that expenditure decisions respond to both interest rates and anticipated inflation in a “Fisherian” fashion, but that the interest elasticity of saving is quite low and of uncertain sign. Our model also provides an estimate of the consumer's “horizon,” defined in the sense of Friedman.     

Economy as Instituted Process: Change,Transformation, and Progress

During the past two decades, chronic fiscal deficits have led to elevated and rising ratios of government debt to nominal GDP in Japan. Nevertheless, long-term Japanese government bonds' (JGBs) nominal yields initially declined, and have since stayed remarkably low and stable. This is contrary to the received wisdom which holds that higher government deficits and indebtedness will exert upward pressures on nominal yields. This paper examines the relationship between JGBs' nominal yields and short-term interest rates, as well as other factors, such as low inflation, persistent deflationary pressures, and tepid growth. We also argue that Japan has monetary sovereignty, which gives the Japanese government the ability to service its debt, and enables the Bank of Japan (BOJ) to keep JGBs' nominal yields low by ensuring that short-term interest rates are low, and by using various other tools of monetary policy. The argument that short-term interest rates and monetary policy are the primarily drivers of long-term interest rates follows John Maynard Keynes's (1930) insights.     

Co-integration,error correction and the Fisher effect: a clarification

The presence of co-integration between interest rates and inflation implies the existence of an error-correction model and the possibility of two sources of causation. Causality testing which does not account for feedback through the error-correction mechanism as well as through the error-correction mechanism as well as through the lagged changes in the variables can produce misleading reuslts. Reinterpreting Atkin' error-correction model and causality tests in this framework points to a feedback relationship between inflation and post-tax nominal interest rates. These findings are consistent with previously published results but are in contrast to Atkinsapos; conclusion of one-way causality from inflation to interest rates.     

Central Bank Behavior, the Institutional Framework, and Policy Regimes: Inflation Versus Noninflation Targeting Countries

This article estimates central bank reaction functions for 20 OECD countries. It bridges the gap between the Taylor reaction function literature and the political-economy literature. Central banks react to both inflation and the output gap. Moreover, inflation-targeting countries have been able to reduce nominal interest rate to a greater extent than have non-inflation-targeting countries. Countries with fixed exchange rates react more strongly to inflation but not at all to the output gap, unlike countries with floating rates. Political influences also seem relatively more important in fixed exchange rate countries. Central bank independence also helps reduce nominal interest rates. (JEL E58 , C31 , C32 , C53 )     

A theorem on interest rate differentials,risk and anticipated inflation

This paper develops a theorem to the effect that the difference in nominal interest rates between two securities of the same maturity but different risk is an increasing linear function of the anticipated rate of inflation. Even when society's inflationary. A preliminary attempt is made to estimate the real risk premiums that finance paper, bankers's, acceptances, commercial paper, certificates of deposit, and Eurodollar deposits command over treasury bills. It is found, for example, that the real risk premium commanded by bankers’ acceptances over treasury bills is five basis points. This means that in a non-inflationary environment, bankers' acceptances would yeild five basis points more than treasury bills. This estimate and the other estimates obtained are not implausiable, but they are probably minimum estimates because of bias in the estimate of inflationary expectations.