Taylor Principle Supplements the Fisher Effect: Empirical Investigation under the US Context

Mohammed Saiful Islam () and Mohammad Hasmat Ali
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Mohammed Saiful Islam: Department of Economics, University of Chittagong
Mohammad Hasmat Ali: Department of Finance and Banking, University of Chittagong

Economia. Seria Management, 2012, vol. 15, issue 1, 189-203

Abstract: This paper reviews the short- and long-run dynamics of interest rate and inflation of the United States. Basing upon quarterly as well as monthly data over the period 1957 to 2010, we find evidence that interest rate behaviour of the Federal Reserve is consistent with the Taylor principle in short run and with the Fisher hypothesis in long run. Entire sample justifies the existence of a long run cointegrating relationship between federal funds rate and inflation characterised as the Fisher effect. When data are split into different subsamples, the cointegrating relationship disappears. Interest rate dynamics of pre-1980 and post-2001 neither track Fisher hypothesis nor Taylor principle, rather represent substantial discretion.

Keywords: Fisher Effect; Monetary Policy; Taylor Principle. (search for similar items in EconPapers)
JEL-codes: E43 E52 E59 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:rom:econmn:v:15:y:2012:i:1:p:189-203

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