Further evidence on the Fisher effect
The strong form of the Fisher hypothesis states that the nominal rate of interest fully adjusts to anticipated inflation. Weaker forms of the hypothesis identify circumstances where the nominal interest rate either overadjusts or underadjusts. Previous tests of the hypothesis using Australian data and error correction techniques have found conflicting results. Vector autoregressive innovations are used to estimate the Fisher equation and, in general, the strong form of the hypothesis is rejected in favour of underadjustment. However, the strong form of the hypothesis cannot be rejected in the period following deregulation of the financial system.