Abstract
The objective of this paper is to provide an examination of the controversy surrounding the existence of the Fisher or the Inverted Fisher hypothesis proposed by Carmichael and Stebbing (1983). We show that the data used by Carmichael and Stebbing (CS) do not support either hypothesis. Employing recent developments in co-integrated variables, we show that their data is compatible with the existence of a long-run relationship between the nominal interest rates and the rates of inflation as postulated by the Fisher hypothesis. Using an error correction modelling approach which allows direct estimation of the long-run coefficients, we show that for the data used by CS the nominal interest rates have not adjusted sufficiently to compensate individuals for either the effect of inflation or taxes on interest income.
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