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Inflation uncertainty and interest rates: is the Fisher relation universal?

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Abstract:

This paper tests the validity of the Fisher hypothesis, which establishes a positive relation between interest rates and expected inflation, for the G7 countries and 45 developing economies. For this purpose, we estimate a version of the GARCH specification of the hypothesis for all countries included in the sample. We also test the augmented Fisher relation by including the inflation uncertainty in the equation. The simple Fisher relation holds in all G7 countries but in only 23 developing countries. There is a positive and statistically significant relationship between interest rates and inflation uncertainty for six of the G7 and 18 of the developing countries and this relationship is negative for seven developing countries.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/00036840500427908

Affiliations: 1: Department of Economics, Bilkent University, Ankara, Turkey 2: Department of Management, Atilim University, Ankara, Turkey 3: Department of Economics, Baskent University, Ankara, Turkey

Publication date: January 1, 2007

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