On some neglected implications of the Fisher effect |
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Authors: | Antonio Ribba |
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Institution: | (1) University of Turku, 20014 Turku, Finland |
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Abstract: | Following the lead of Fama American Economic Review 65 (1975) 269–282] and of other influential articles, such as Mishkin
Journal of Monetary Economics 30 (1992) 195–215], it has become standard to interpret the Fisher effect as the ability of
short-term interest rate to predict future inflation. However, in this article we demonstrate that by restricting to zero
the instantaneous response of expected inflation to an interest rate shock, one can identify a disturbance that economic agents,
according to the Fisherian framework, should evaluate as transitory. An important implication of this result is that short-term
nominal interest rates cannot be interpreted as predictors, at least not long-run predictors, of inflation. We illustrate
this result with an empirical application to US postwar data. |
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