Testing the Fisher Effect as a Long-Run Equilibrium Relationship
Applied Financial Economics
The recent advances in the econometrics of integrated time series by Johansen are applied to the much examined Fisher effect. While the existing literature is concerned with whether there is a stable long-run equilibrium relation between the nominal rate of interest and inflation, the existence of a one-to-one relation along this path is also tested. Moreover, it is found that in the long run there is a unidirectional causality from the inflation rate to the rate of interest. However, in the short-run there is a feedback (bi-directional causality) between the two variables.