Abstract
Abstract This paper resolves the puzzle of why a strong Fisher effect (a high correlation between the level of interest rates and inflation) occurs only during certain periods but not for others. Empirical evidence finds no support for a short-run Fisher effect in which a change in expected inflation is associated with a change in interest rates, but supports the existence of a long-run Fisher effect in which inflation and interest rates have a common stochastic trend when they exhibit trends. These results indicate that a strong Fisher effect will only appear in samples where inflation and interest rates have trends.
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