A Long-Run Non-Linear Approach to the Fisher Effect |
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Authors: | DIMITRIS K CHRISTOPOULOS MIGUEL A LEÓN-LEDESMA† |
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Institution: | Department of Economic and Regional Development, Panteion University (E-mail: );. Economics in the Department of Economics, University of Kent (E-mail: ). |
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Abstract: | We argue that the empirical failure of the Fisher effect found in the literature may be due to the existence of non-linearities in the long-run relationship between interest rates and inflation. We present evidence that, for the U.S. during the 1960–2004 period, the Fisher relation presents important non-linearities. We model the long-run non-linear relationship and find that an ESTR model for the pre-Volcker era and an LSTR model for the post-Volcker era are able to control for non-linearities and constitute long-run co-integration vectors. Monte Carlo evidence produces support for the hypothesis that non-linearities may also be responsible for the less than proportional coefficients of inflation usually found in the linear specifications. |
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Keywords: | E43 C32 |
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