International Evidence on the Fisher Relation

This paper uses data on short-term nominal interest rates and inflation rates over the last three decades collected from eight industrialized nations to examine the whether the Fisher relation has empirical support internationally. The results indicate that the Fisher relation has a great deal of support with all eight countries exhibiting cointegration between nominal rates and inflation. In seven of the eight countries, the Fisher effect estimate is statistically greater than one implying significant tax effects as hypothesized by Darby (1975). Finally, our analysis of the error correction models reveal that inflation is weakly exogenous and therefore the source of the common trend in each system.