August, 2000

Evaluating the Fisher effect in long-term cross-country averages

  • Lee Coppock

    Associate Professor of Economics, University of Virginia
  • Marc Poitras

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This article uses long-term cross-country data to examine the Fisher hypothesis that nominal interest rates respond point-for-point to changes in the expected inflation rate. The analysis employs bounded-influence estimation to limit the effects of hyperinflation countries such as Brazil and Peru. Contrary to the results in Duck (1993), the present evidence does not support a full Fisher effect. By extending the empirical model to account for cross-country differences in sovereign risk, we find evidence consistent with the idea that interest rates fail to fully adjust to inflation due to variation in the implicit liquidity premium on financial assets.

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