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The Inverted Fisher Hypothesis: Inflation Forecastability and Asset Substitution Woon Gyu Choi Full Text of this Article (PDF 289K) Abstract: This paper examines the implications of inflation
persistence for the inverted Fisher hypothesis that nominal interest rates
do not adjust to inflation because of a high degree of substitutability
between money and bonds. It is emphasized that the substitutability between
nominal assets and capital renders the hypothesis inconsistent with the
data when inflation persistence is high. Using a switching regression
model, the analysis allows the reflection of inflation in interest rates
to vary according to the degree of inflation persistence or forecastability.
The hypothesis is supported by U.S. data only when inflation forecastability
is below a certain threshold. |
