The Inverted Fisher Hypothesis : Inflation Forecastability and Asset Substitution"

Author/Editor:

Woon Gyu Choi

Publication Date:

December 1, 2000

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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.

Series:

Working Paper No. 00/194

Subject:

English

Publication Date:

December 1, 2000

ISBN/ISSN:

9781451859850/1018-5941

Stock No:

WPIEA1942000

Format:

Paper

Pages:

36

Please address any questions about this title to publications@imf.org