The Fisher Hypothesis and Inflation Persistence: Evidence From Five Major Industrial Countries

Wensheng Peng

No 1995/118, IMF Working Papers from International Monetary Fund

Abstract: This paper presents an empirical evaluation of the strength of the Fisher effect which predicts a positive relationship between the nominal interest rate and inflation in the postwar period in the five major industrial countries, utilizing recently developed time series techniques. The results suggest that the Fisher effect is stronger in France, the United Kingdom, and the United States than in Germany and Japan. It is argued that the differences in the linkage between the interest rate and the inflation rate as between the two groups of countries are reflected in the time series properties of the inflation rates, which are, in turn, partly attributable to the different extent to which monetary authorities accommodated inflationary shocks. The empirical results have a number of implications for the long-term trend in the SDR interest rate and for the financing of the Fund’s operations.

Keywords: WP; interest rate; nominal interest rate; anti-inflation commitment; Fisher hypothesis; interest rate data; time series technique; interest rate observation; component interest rates; interest rates in the United States; Fisher effect; real rate of interest; short-run interest rate; Inflation; SDR interest rate; Real interest rates; Inflation persistence; Business cycles (search for similar items in EconPapers)
Pages: 28
Date: 1995-11-01
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Citations: View citations in EconPapers (7)

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