Do Expected Shifts in Inflation Affect Estimates of the Long Run Fisher Relation?

Posted: 26 Oct 1999

See all articles by Martin D.D. Evans

Martin D.D. Evans

Georgetown University - Department of Economics

Karen K. Lewis

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Abstract

Recent empirical studies suggest that nominal interest rates and expected inflation do not move together one for one in the long run, a finding at odds with many theoretical models. This paper shows that these results can be deceptive when the process followed by inflation shifts infrequently. We characterize the shifts in inflation by a Markov switching model. Based upon this model's forecasts, we re examine the long run relationship between nominal interest rates and inflation. Interestingly, we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one for one.

JEL Classification: G1, G2

Suggested Citation

Evans, Martin D.D. and Lewis, Karen Kay, Do Expected Shifts in Inflation Affect Estimates of the Long Run Fisher Relation?. Available at SSRN: https://ssrn.com/abstract=5906

Martin D.D. Evans

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-1570 (Phone)
202-687-6102 (Fax)

Karen Kay Lewis (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7637 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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