TESTING INDIRECT FISHER EFFECT FOR INDIA
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ABSTRACT To Irving Fisher, the market agents in capital markets respond to the changes in the real, rather than, the nominal interest rate. Since any rise in the rate of inflation lowers the real interest rate, a fall in the real interest rate must be compensated for by an equal rise in the (market) interest rate. As such, the interest rate must rise (fall) by the amount of the rise (fall) in the rate of inflation. This one-to-one correspondence of the interest rate with the rate of inflation is termed as the Fisher effect, which has been tested several times by several researchers, in different frameworks, with different econometric techniques, and on cross-sectional, as well as, time series data. Our study takes a different approach. Instead of asking whether a change in inflation rate affects the nominal interest rate one-for-one, we ask whether the exchange rate between two currencies is affected by the change in interest rates in the two countries if the Fisher effect is for real. In our study, thus, the validity of Fisher effect is tested while examining the relationship between the exchange rate and the interest rates in two countries. We tested our model on the data for exchange rate of Indian currency with the U.S. dollar and on the interest rates in India and the United States for the years 1961-2014 and found no evidence of the Fisher effect. Keywords purchasing power parity, exchange rate, interest rate, stationarityKeywords:
International Fisher effect
Fisher equation
Covered interest arbitrage
International Fisher effect
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The Fisher effect postulated that real interest rate is constant, and that nominal interest rate and expected inflation move one-for-one together. This paper employs Johansen’s method to investigate for the existence of a long-run Fisher effect in the Singapore economy over the period 1976 to 2006, and finds evidence of a positive relationship between nominal interest rate and inflation rate while rejecting the notion of a full Fisher Effect. The dynamic relationship between nominal interest rate and inflation rate is also examined from the error-correction models derived, and the analysis is extended to investigate the impulse response functions of inflation and nominal interest rates where we discover the presence of the Price Puzzle in the Singapore market.
International Fisher effect
Fisher equation
Impulse response
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Fisher equation
Distributed lag
International Fisher effect
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The Fisher Effect postulated that real interest rate is constant, and that nominal interest rate and expected inflation move one-for-one together. This paper employs Johansen's method to investigate for the existence of a long-run Fisher effect in the Singapore economy over the period 1976 to 2006, and finds evidence of a positive relationship between nominal interest rate and inflation rate while rejecting the notion of a full Fisher Effect. The dynamic relationship between nominal interest rate and inflation rate is also examined from the error-correction models derived, and the analysis is extended to investigate the impulse response functions of inflation and nominal interest rates where we discover the presence of the Price Puzzle in the Singapore market.
International Fisher effect
Fisher equation
Impulse response
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International Fisher effect
Fisher equation
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The Fisher effect postulated that real interest rate is constant, and that nominal interest rate and expected inflation move one-for-one together. This paper employs Johansen’s method to investigate for the existence of a long-run Fisher effect in the Singapore economy over the period 1976 to 2006, and finds evidence of a positive relationship between nominal interest rate and inflation rate while rejecting the notion of a full Fisher Effect. The dynamic relationship between nominal interest rate and inflation rate is also examined from the error-correction models derived, and the analysis is extended to investigate the impulse response functions of inflation and nominal interest rates where we discover the presence of the Price Puzzle in the Singapore market.
International Fisher effect
Fisher equation
Impulse response
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The Fisher equation predicts that nominal interest rates and inflation should move together one-for-one. Recently published work argues that both nominal interest rates and inflation are non-linear. The evidence in this paper suggests that nominal interest rates are well described as two-regime threshold unit root processes. However, inflation and real interest rates appear to be stationary threshold processes. This is consistent with a threshold processes. This is consistent with a threshold cointegrating relationship between nominal interest rates and inflation. The long run Fisher equation describes the relationship between real interest rate inflation in periods of high inflation. In the low inflation regime shocks to real interest rates are highly persistent.
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The aim of this paper is to examine the implementation of the well-known Fisher Hypothesis (FH) for Albania. Fisher Hypothesis investigates the relationship that exists between the expected inflation and interest rates and to which extent holds the Fisher effect, for the period 1997-2013. The first step of the study is an introduction of the Fisher Hypothesis, its definition and the main points. The second part includes an econometric model, by using the Johansen Cointegration Test for the Albanian quarterly nominal interest rate and quarterly inflation rate, in order to explain as correctly as possible the relationship between inflation and interest rate. In the end the empirical results disclosed that there is a long run relationship between nominal interest rates and inflation. This indicates that full Fisher hypothesis does not hold but there is a very strong Fisher effect in the Case of Albania regarding the period under study. DOI: 10.5901/mjss.2014.v5n13p334
International Fisher effect
Fisher equation
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ABSTRACT To Irving Fisher, the market agents in capital markets respond to the changes in the real, rather than, the nominal interest rate. Since any rise in the rate of inflation lowers the real interest rate, a fall in the real interest rate must be compensated for by an equal rise in the (market) interest rate. As such, the interest rate must rise (fall) by the amount of the rise (fall) in the rate of inflation. This one-to-one correspondence of the interest rate with the rate of inflation is termed as the Fisher effect, which has been tested several times by several researchers, in different frameworks, with different econometric techniques, and on cross-sectional, as well as, time series data. Our study takes a different approach. Instead of asking whether a change in inflation rate affects the nominal interest rate one-for-one, we ask whether the exchange rate between two currencies is affected by the change in interest rates in the two countries if the Fisher effect is for real. In our study, thus, the validity of Fisher effect is tested while examining the relationship between the exchange rate and the interest rates in two countries. We tested our model on the data for exchange rate of Indian currency with the U.S. dollar and on the interest rates in India and the United States for the years 1961-2014 and found no evidence of the Fisher effect. Keywords purchasing power parity, exchange rate, interest rate, stationarity
International Fisher effect
Fisher equation
Covered interest arbitrage
Cite
Citations (0)
The Fisher Effect postulated that real interest rate is constant, and that nominal interest rate and expected inflation move one-for-one together. This paper employs Johansen's method to investigate for the existence of a long-run Fisher effect in the Singapore economy over the period 1976 to 2006, and finds evidence of a positive relationship between nominal interest rate and inflation rate while rejecting the notion of a full Fisher Effect. The dynamic relationship between nominal interest rate and inflation rate is also examined from the error-correction models derived, and the analysis is extended to investigate the impulse response functions of inflation and nominal interest rates where we discover the presence of the Price Puzzle in the Singapore market.
International Fisher effect
Fisher equation
Impulse response
Cite
Citations (2)