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Article: The long-run relationship between nominal interest rates and inflation: the Fisher equation revisited.(correct estimation of Fisher relation shows inflation innovation to be the source of interest-rate instability)
- Article from:
- Journal of Money, Credit & Banking
- Article date:
- February 1, 1996
- Author:
CopyrightCOPYRIGHT 1996 Ohio State University Press. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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THE PAST SEVERAL DECADES have seen numerous empirical studies of the Fisher equation. This well-known hypothesis, introduced by Irving Fisher (1930), maintains that the nominal interest rate is the sum of the constant real rate and expected decline in the purchasing power of money. Starting with Fisher and extending to the present (for example, Mishkin 1992 and Evans and Lewis 1995), this seemingly simple and intuitive hypothesis has found limited empirical support. Typically, the estimated coefficients on expected inflation are substantially less than the hypothesized value of one, excluding tax considerations. When tax effects (see Darby 1975) are considered, the ...