Abstract
Abstract This study investigates the asymmetric impacts of changes in inflation rates on the US bond rates. This investigation is constructed on the Fisher Equation. To this end, the nonlinear ARDL model is applied. Empirical findings indicate that only the decreases (π− t ) in inflation rates affect bond rates. This asymmetric impact therefore shapes the FED’s monetary policy in terms of determining the bond rates at lower cost. When the inflation rate rises, the FED will know (in advance) that they do not need to increase the bond rates. This reminds us the FED’s former pre-emptive strike policy against inflation.
Highlights
For over 80 years, researchers have evaluated the link between interest rates and inflation
This study investigates the asymmetric impacts of changes in inflation rates on the US bond rates
With the absence of money illusion, the expected inflation rate should be fully transmitted to the nominal interest rate, so that rte is approximately constant in the long run
Summary
For over 80 years, researchers have evaluated the link between interest rates and inflation. Fisher (1930) postulates this relationship as a one-to-one long-run relationship running from expected inflation rates to interest rates, where interest rates closely follow price changes. According to Fisher (1930), nominal interest rates incorporate the expected inflation rates, without affecting the real interest rates. This relationship, coined as the “Fisher effect”, has since become a special matter of interest to economists and monetary authorities, due to the fact that the absence or presence of this link is crucially important for macroeconomic decisions
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