A long memory test of the long-run Fisher effect in the G7 countries

Research output: Contribution to journalArticle

18 Citations (Scopus)

Abstract

The belief that short-term interest rates respond positively to changes in price level, commonly known as the Fisher effect, are currently being investigated extensively by financial researchers. Over the long run the hypothesis implies the presence of an equilibrium relationship between interest rates and inflation. Early evidence favouring the Fisher effect is found not to be consistent in certain time periods and some countries. This paper examines the presence of the effect in the G7 countries. An ARFIMA (Autoregressive Fractionally Integrated Moving Average) model is employed that generalized the standard ARIMA by allowing fractional differencing. Based on the generalized ARFIMA estimation, the cointegration hypothesis between short-term interest rates and inflation cannot be supported. Interest rates in the G7 countries are not linked to inflation rate in the long run. The puzzling evidence rejecting the Fisher effect remains as the proposed relationship between interest rates and inflation is not real in these countries.

Original languageEnglish
Pages (from-to)763-769
Number of pages7
JournalApplied Financial Economics
Volume13
Issue number10
DOIs
Publication statusPublished - Oct 2003

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G-7 country
interest rate
inflation
price level
evidence
effect
test
Long memory
Inflation
G-7 countries
Fisher effect
Interest rates
Short-term interest rates
Integrated
Moving average

ASJC Scopus subject areas

  • Geography, Planning and Development

Cite this

A long memory test of the long-run Fisher effect in the G7 countries. / Ghazali, Noor Azlan; Ramlee, Shamshubaridah.

In: Applied Financial Economics, Vol. 13, No. 10, 10.2003, p. 763-769.

Research output: Contribution to journalArticle

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