IMF Working Papers

The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution"

By Woon Gyu Choi

December 1, 2000

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Woon Gyu Choi. The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution", (USA: International Monetary Fund, 2000) accessed November 8, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

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

Keywords: Asset substitution, Castability index, Consumer price indexes, High-inflation regime, Inflation, Inflation forecastability, Inflation level, Inflation persistence, Inflation process, Inverted Fisher hypothesis, Low-to-moderate inflation economy, Marginal effective tax rate, Nominal interest rate, Null hypothesis, Rate of return, Real interest rates, Switching regression, Threshold effect, WP

Publication Details

  • Pages:

    36

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2000/194

  • Stock No:

    WPIEA1942000

  • ISBN:

    9781451859850

  • ISSN:

    1018-5941