Evaluating the Fisher effect in long-term cross-country averages |
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| Institution: | 1. Department of Economics, Hillsdale College, Hillsdale, MI 49242, USA;2. Department of Economics and Finance, University of Dayton, Dayton, OH 45469-2240, USA;1. Development Finance Centre, Graduate School of Business, University of Cape Town, Cape Town, South Africa;2. University of Westminster, Department of Economics and Quantitative Methods, UK;3. School of Economics, Finance and Accounting, Faculty of Business and Law, Coventry University Priory Street, Coventry, CV1 5FB, UK;4. Faculty of Applied Economics, University of Antwerp, Antwerp, Belgium;1. Department of Economics, Southern Illinois University, Edwardsville, IL 62026-1102, USA;2. Department of Economics, University of Texas at San Antonio, San Antonio, TX 78249-0633, USA;1. Department of Physics, University of Toronto, 60 St. George St., Toronto, ON, Canada M5S 1A7;2. Department of Physics, University of New Brunswick, Saint John, NB, Canada E2L 4L5;3. Department of Physics, St. Francis Xavier University, Antigonish, Nova Scotia, Canada B2G 2W5;1. National Taiwan Normal University, Taiwan;2. Ming Chuan University, Taiwan |
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| Abstract: | This article uses long-term cross-country data to examine the Fisher hypothesis that nominal interest rates respond point-for-point to changes in the expected inflation rate. The analysis employs bounded-influence estimation to limit the effects of hyperinflation countries such as Brazil and Peru. Contrary to the results in Duck (1993), the present evidence does not support a full Fisher effect. By extending the empirical model to account for cross-country differences in sovereign risk, we find evidence consistent with the idea that interest rates fail to fully adjust to inflation due to variation in the implicit liquidity premium on financial assets. |
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