Changes in Regime and the Long Run Fisher Effect: a Threshold Cointegration Analysis

Ólan Henry

No 720, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: The Fisher equation predicts that nominal interest rates and inflation should move together one-for-one. Recently published work argues that both nominal interest rates and inflation are non-linear. The evidence in this paper suggests that nominal interest rates are well described as two-regime threshold unit root processes. However, inflation and real interest rates appear to be stationary threshold processes. This is consistent with a threshold processes. This is consistent with a threshold cointegrating relationship between nominal interest rates and inflation. The long run Fisher equation describes the relationship between real interest rate inflation in periods of high inflation. In the low inflation regime shocks to real interest rates are highly persistent.

Keywords: INTEREST RATE; MACROECONOMICS; ECONOMIC THEORY (search for similar items in EconPapers)
JEL-codes: E00 E31 E40 (search for similar items in EconPapers)
Pages: 29 pages
Date: 1999
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:720

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