Title

Is it really the Fisher effect?

Document Type

Working Paper

Journal/Book Title/Conference

Applied Economics Letters

Volume

13

Article

1040

Issue

4

Pages

201-206

Publication Date

3-2006

Department or Program

Economics Department

Abstract

Many researchers have used a cointegration approach to test for the Fisher effect. This note argues that the cointegration of the nominal interest rate and the inflation rate is consistent with any theory implying a stationary real interest rate and so is not a sufficient condition for ex post the Fisher effect to hold. The sufficient condition is the unpredictability of the inflation forecast error implied by the nominal interest rate and this condition may be tested using the signal extraction framework of Durlauf and Hall (1988, 1989).