Abstract
This study reconsiders the common unit root/co-integration approach to test for the Fisher effect for the economies of the G7 countries. We first show that nominal interest and inflation rates are better represented as I(0) variables. Later, we use the Bai–Perron procedure to show the existence of structural changes in the Fisher equation. After considering these breaks, we find very limited evidence of a total Fisher effect as the transmission coefficient of the expected inflation rates to nominal interest rates is very different than one.
Highlights
One of the most important results from classical economic theory is that the movements of nominal variables have no impact on real economic variables
We have taken all of the possible combinations of five and six countries, and the values of the CIPS* statistic always allows the rejection of the null hypothesis, the average p-value being lower than 0.01 this lack of evidence against the null hypothesis matches the results of Constantini and Lupi (2007) [40] and Lee and Chang (2007, 2008) [41,42], who reject the presence of a unit root in the inflation rate for different sample sizes of OECD countries using the LM
We offer evidence of the fact that the nominal interest rates and inflation rates of the
Summary
One of the most important results from classical economic theory is that the movements of nominal variables have no impact on real economic variables. When these are applied to the nominal interest and inflation rates of the economies of the G7 countries, we find that they allow us to reject the unit root null hypothesis, a result that suggests that it is more advisable to analyze the Fisher effect in a stationary framework, rather than in a non-stationary one.
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