Do Expected Shifts in Inflation Affect Estimates of the Long‐Run Fisher Relation?

  • Author(s): MARTIN D. D. EVANS, KAREN K. LEWIS
  • Published: Apr 30, 2012
  • Pages: 225-253
  • DOI: 10.1111/j.1540-6261.1995.tb05172.x

ABSTRACT

Recent empirical studies suggest that nominal interest rates and expected inflation do not move together one‐for‐one in the long run, a finding at odds with many theoretical models. This article shows that these results can be deceptive when the process followed by inflation shifts infrequently. We characterize the shifts in inflation by a Markov switching model. Based upon this model's forecasts, we reexamine the long‐run relationship between nominal interest rates and inflation. Interestingly, we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one‐for‐one.

Jump to menu

Main Navigation

Search the Site / Journal

Search Keywords

Search Tips

Members' Login

Credentials

Members' Options

Site Footer

View Mobile Version