Asymmetric Fisher effect in inflation targeting emerging markets: evidence from quantile co-integration

ABSTRACT

We test Fisher hypothesis in 14 inflation targeting emerging countries by quantile co-integration approach allowing asymmetric behaviour of long-run co-integration relationship. While conventional co-integration methods do not support Fisher hypothesis for any country, quantile co-integration approach confirms Fisher hypothesis in nine countries with time-varying behaviour of Fisher coefficient. Our results thereby can shed light on Fisher puzzle in inflation targeting emerging markets and provide insightful implications. The findings suggest that inflation targeting in emerging markets would lead to an asymmetric adjustment, implying heterogeneous effects of negative and positive shocks. Monetary authorities, in particular, tend to increase short-term interest rates by a larger amount during high inflation period than low inflation period.

KEYWORDS:

• Fisher hypothesis
• inflation targeting
• emerging markets
• quantile co-integration

JEL CLASSIFICATION:

• C22
• E31
• E43

Acknowledgements

Authors would like to thank the Editor (D. Peel) and two anonymous referees for their helpful comments that improve the article. All errors remain our own.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Availability of data and material

The data and material are available upon request from corresponding author.

Code availability

The codes are available upon request from corresponding author.

Notes

¹ See Panopoulou and Pantelidis (2016) for empirical literature survey.

² See Christopoulos and León-Ledesma (2007) for more discussion.

³ Classification is available at https://www.msci.com/market-classification.

⁴ We cannot include Argentina, Russia, and India because they have adopted inflation targeting since 2014 (Russia) and 2016 (Argentina and India).

⁵ Data is available at https://data.imf.org/regular.aspx?key=63087881 for interest rates; https://data.imf.org/regular.aspx?key=63087884 for consumer price indexes; and https://data.oecd.org/interest/short-term-interest-rates.htm for interest rate of Indonesia.

⁶ EG-ADF is based on testing for unit root in regression residuals of equation (2)(2) $i_t=\alpha +\beta {\pi }_t+{\epsilon }_t$(2) by ADF test, and Shin is based on testing for stationarity by KPSS test. The unit root and co-integration tests were conducted with TSPDLIB developed by Nazlioglu (2021).

⁷ We estimate QCR with K equal to one, two, and three; and obtain similar results which are available upon request. In order to save space, results for one lag and lead are reported in Table 3.

Additional information

Funding

There is no funding information.