The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution"

Author/Editor:

Woon Gyu Choi

Publication Date:

December 1, 2000

Electronic Access:

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Summary:

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.

Series:

Working Paper No. 2000/194

Subject:

Consumer price indexes Financial services Inflation Inflation persistence Marginal effective tax rate Prices Real interest rates Tax policy

English

Publication Date:

December 1, 2000

ISBN/ISSN:

9781451859850/1018-5941

Stock No:

WPIEA1942000

Pages:

36

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