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

IMF Working Papers, November 1, 1995

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

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Bibliographic details

• Authors: Wensheng Peng
• Published: November 1, 1995
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451940824.001

Summary

• 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.

Empirical findings

• Fisher effect strength by country group:
  • Stronger Fisher effect: France, the United Kingdom, the United States.
  • Weaker Fisher effect: Germany, Japan.
• Methodology:
  • Utilizes recently developed time series techniques (as stated).
• Linkage interpretation:
  • Differences in the interest rate–inflation linkage are reflected in the time series properties of inflation rates.
  • These time series properties are partly attributable to the different extent to which monetary authorities accommodated inflationary shocks.

Implications and interpretations

• Long-term SDR interest rate:
  • The empirical results imply consequences for the long-term trend in the SDR interest rate.
• Financing of the Fund’s operations:
  • The paper notes implications for the financing of the Fund’s operations stemming from the strength of the Fisher effect and inflation persistence across countries.

Subject areas and keywords

• Subject: Business cycles, Economic growth, Financial services, Inflation, Inflation persistence, Prices, Real interest rates, SDR interest rate
• Keywords: anti-inflation commitment, Business cycles, component interest rates, Fisher effect, Fisher hypothesis, Inflation, Inflation persistence, interest rate, interest rate data, interest rate observation, interest rates in the United States, nominal interest rate, Real interest rates, real rate of interest, SDR interest rate, short-run interest rate, time series technique, WP