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Empirical Economics

, Volume 26, Issue 2, pp 357–366 | Cite as

Near unit root and the relationship between inflation and interest rates: A reexamination of the Fisher effect

  • Markku Lanne

Abstract.

Tests of the Fisher effect are plagued by high persistence in interest rates. Instead of standard regression analysis and asymptotic results, methods relying on local-to-unity asymptotics are employed in testing for the Fisher effect with monthly U.S. data covering the period 1953:1–1990:12. These procedures are extensions of a recently presented method (Cavanagh, Elliott and Stock (1995)) based on simultaneous confidence intervals, and they have the advantage of being asymptotically valid whether interest rates are integrated of order one or zero, or near unit root processes. Taking appropriately account of the near unit root problem the findings in most of the previous literature are reconfirmed. There is support for the Fisher effect in the interest rate targeting period (1953:1–1979:10) of the Federal Reserve but not in the 1979:11–1990:12 period.

Key words: Fisher effect near unit root monetary policy 
JEL classification: E31 C32 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2001

Authors and Affiliations

  • Markku Lanne
    • 1
  1. 1.Research Unit on Economic Structures and Growth, Department of Economics, P.O. Box 54 (Unioninkatu 37), FIN-00014 University of Helsinki, Finland (e-mail: markku.lanne@helsinki.fi)FI

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