The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution"

Woon Gyu Choi

No 2000/194, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the implications of inflation persistence for the inverted Fisher hypothesis that nominal interest rates do not adjust to inflation because of a high degree of substitutability between money and bonds. It is emphasized that the substitutability between nominal assets and capital renders the hypothesis inconsistent with the data when inflation persistence is high. Using a switching regression model, the analysis allows the reflection of inflation in interest rates to vary according to the degree of inflation persistence or forecastability. The hypothesis is supported by U.S. data only when inflation forecastability is below a certain threshold.

Keywords: WP; nominal interest rate; null hypothesis; rate of return; Inverted Fisher hypothesis; asset substitution; inflation forecastability; switching regression; threshold effect; castability index; inflation process; inflation level; high-inflation regime; low-to-moderate inflation economy; Inflation; Marginal effective tax rate; Inflation persistence; Consumer price indexes; Real interest rates (search for similar items in EconPapers)
Pages: 36
Date: 2000-12-01
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Citations: View citations in EconPapers (2)

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Journal Article: The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution (2002)
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