New Hope for the Fisher Effect?: A Reexamination Using Threshold Cointegration

University of Bonn, SFB 303 Discussion Paper B-385

Posted: 28 Oct 1996

Date Written: October 1996

Abstract

This paper reassesses the Fisher effect using German data. It argues that the empirical rejection of the Fisher effect in previous studies, i.e., the finding of nominal interest rates not fully adjusting to changes in inflation, may be attributed to the particular time series behavior of inflation and interest rates which cannot be accounted for by standard non-stationary models. The stochastic process governing the bivariate system of inflation and interest rates depends on the level of the variables. Inside a band of "tolerable" inflation the system is non-stationary and cointegrated, while outside this band the system exhibits mean-reversion (threshold cointegration). Contrary to the unit root hypothesis, this approach can be given a meaningful interpretation in terms of the opportunistic approach to disinflation. The strict Fisher effect, even in its tax adjusted form, cannot be rejected when a threshold cointegration model is estimated. The threshold cointegration model may not only explain the downward bias of the coefficient estimates but also the sample sensitivity observed in previous studies.

JEL Classification: E43, E31

Suggested Citation

Weidmann, Jens, New Hope for the Fisher Effect?: A Reexamination Using Threshold Cointegration (October 1996). University of Bonn, SFB 303 Discussion Paper B-385, Available at SSRN: https://ssrn.com/abstract=3555

Jens Weidmann (Contact Author)

Federal Statistical Office ( email )

Gustav - Stresemann - Ring 11
Wiesbaden, 65189
Germany

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