The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution
IMF Working Papers, December 1, 2000
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- The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution
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Bibliographic details
- Authors: Woon Gyu Choi
- Published: December 1, 2000
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451859850.001
Key question and approach
- Examines implications of inflation persistence for the inverted Fisher hypothesis: nominal interest rates do not adjust to inflation because of a high degree of substitutability between money and bonds.
- Emphasizes that substitutability between nominal assets and capital can make the inverted Fisher hypothesis inconsistent with the data when inflation persistence is high.
- Uses a switching regression model to allow the reflection of inflation in interest rates to vary according to the degree of inflation persistence or forecastability.
- Tests the hypothesis using U.S. data and a threshold on inflation forecastability.
Main findings
- The substitutability between nominal assets and capital renders the inverted Fisher hypothesis inconsistent with the data when inflation persistence is high.
- The inverted Fisher hypothesis is supported by U.S. data only when inflation forecastability is below a certain threshold.
- The analysis highlights a threshold effect: the degree to which nominal interest rates reflect inflation depends on inflation persistence/forecastability.
Methodology
- Empirical framework: switching regression model that allows the relationship between inflation and nominal interest rates to change with inflation persistence/forecastability.
- Focus on how inflation forecastability/ persistence governs whether inflation is reflected in interest rates.
Relevant subjects and keywords (as listed)
- Subjects: 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
Content in this bundle
- The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution - WP/00/194