We thank Yunus Aksoy, Alan Carruth, Mathan Satchi, and an anonymous referee for helpful comments. We would also like to thank In Choi and James Hamilton for making available some of the GAUSS codes used in this paper.
A Long-Run Non-Linear Approach to the Fisher Effect
Article first published online: 18 APR 2007
Journal of Money, Credit and Banking
Volume 39, Issue 2-3, pages 543–559, March–April 2007
How to Cite
CHRISTOPOULOS, D. K. and LEÓN-LEDESMA, M. A. (2007), A Long-Run Non-Linear Approach to the Fisher Effect. Journal of Money, Credit and Banking, 39: 543–559. doi: 10.1111/j.0022-2879.2007.00035.x
- Issue published online: 18 APR 2007
- Article first published online: 18 APR 2007
- Received December 5, 2005; and accepted in revised form March 10, 2006.
- Fisher effect;
We argue that the empirical failure of the Fisher effect found in the literature may be due to the existence of non-linearities in the long-run relationship between interest rates and inflation. We present evidence that, for the U.S. during the 1960–2004 period, the Fisher relation presents important non-linearities. We model the long-run non-linear relationship and find that an ESTR model for the pre-Volcker era and an LSTR model for the post-Volcker era are able to control for non-linearities and constitute long-run co-integration vectors. Monte Carlo evidence produces support for the hypothesis that non-linearities may also be responsible for the less than proportional coefficients of inflation usually found in the linear specifications.