A re-examination of the Fisher effect using an alternative approach

Abstract

The Fisher Effect (FE) is of fundamental importance in financial markets. The majority of previous studies have not managed to obtain the expected one-for-one reaction of the nominal interest rate to the inflation rate. The aim of this article is to reinvestigate the FE for the USA and the UK using a case-wise bootstrap approach developed by Hatemi-J and Hacker (2005). This method is robust to nonnormality or heteroscedasticity and it is used to calculate and test the statistical significance of the coefficients. The results support a tax-adjusted FE in the presence of a structural break.

Notes

¹Peso problem refers to a situation in which a security that has displayed great stability over a long period suddenly and unexpectedly collapses.

²A similar approach is utilized by Crowder and Wohar (1999).

³For an international version of the Fisher effect, see Hatemi-J (2009).

⁴The Hatemi-J and Hacker (2005) method is not described here to save space. The interested reader is referred to the original paper for a description of the underlying methodology.

⁵Unit-root tests showed that each variable is I(1). Gregory–Hansen tests showed that there is cointegration in each case.