Some Empirical Evidence on Models of Fisher Relation

Jae-Young Kim ; Woong Yong Park

Jae-Young Kim, Professor, Department of Economics Seoul National University, Kwanak-gu Kwanak-Ro 1, Seoul, 08826, Korea, Tel: +82-2-880-6390, Fax: +82-2-886-4231 jykim017@snu.ac.kr
Woong Yong Park, Assistant Professor, Department of Economics Seoul National University, Kwanak-gu Kwanak-Ro 1, Seoul, 08826, Korea, Tel: +82-2-880-2295, Fax: +82+2-886-4231 woongyong.park@snu.ac.kr

JEL Classification: C1, C22, C5

Abstract

The Fisher relation, describing a one-for-one relation between nominal interest rate and expected inflation, underlies many important results in economics and finance. The Fisher relation is a conceptually simple relation, but the empirical evidence of it is more or less complicated with mixed results. Several alternative models with different implications were proposed in empirical literature for the Fisher relation. We evaluate these alternative models for the Fisher relation based on a post-data model determination method. Our result for data from the U.S. and Korea shows that models with both regimes/periods, a regime with nonstationary fluctuations and the other with stationary fluctuations, fit data best for the Fisher relation.

Keywords:

Fisher relation, Nonlinear behavior, Post-data model determination

Acknowledgments

The authors thank the co-editor and two anonymous referees for helpful comments. This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2013S1A5B8A01054955).

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