The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution"
December 1, 2000
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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.
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
Pages:
36
Volume:
2000
DOI:
Issue:
194
Series:
Working Paper No. 2000/194
Stock No:
WPIEA1942000
ISBN:
9781451859850
ISSN:
1018-5941
