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A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators
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A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators

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  • Ekaterini Panopoulou

Abstract

This paper attempts a resolution of the Fisher effect puzzle in terms of estimator choice. Using both short-term and long-term interest rates for 14 OECD countries, we find ample evidence supporting the existence of a long-run Fisher effect in which interest rates move oneto- one with inflation. Our results suggest that the reason why the Fisher effect has not found support internationally lies on the estimation method. When the hypothesis of a unit coefficient relating interest rates to expected inflation is tested within the Autoregressive Distributed Lag (ADL) framework, which is invariant to the integration properties of the data, the Fisher effect easily survives the empirical evidence. Similar, but less robust, results are reached on the grounds of the Pre-Whitened Fully Modified Least Squares (PW-FMLS) or the Johansen’s (JOH) estimators.

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  • Ekaterini Panopoulou, 2005. "A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators," The Institute for International Integration Studies Discussion Paper Series iiisdp067, IIIS.
    • Handle: RePEc:iis:dispap:iiisdp067
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    Cited by:

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    2. Ismet Gocer & Serdar Ongan, 2020. "The Relationship between Inflation and Interest Rates in the UK: The Nonlinear ARDL Approach," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(3), pages 77-86.
    3. Jesús Clemente & María Dolores Gadea & Antonio Montañés & Marcelo Reyes, 2017. "Structural Breaks, Inflation and Interest Rates: Evidence from the G7 Countries," Econometrics, MDPI, vol. 5(1), pages 1-17, February.
    4. Sunal, Onur, 2022. "The efficiency of primary sovereign bond markets in Turkey: The so-called Fisher puzzle reconsidered," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 255-261.
    5. El-Shagi, Makram, 2009. "Inflation Expectations: Does the Market Beat Professional Forecasts?," IWH Discussion Papers 16/2009, Halle Institute for Economic Research (IWH).
    6. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.

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    More about this item

    Keywords

    Cointegration Estimators; Fisher Effect; ADL; DOLS; Small-sample properties;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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