Panel Estimates of the Fisher Effect

The relationship between inflation and interest rates represents one of the crucial tests of monetary super-neutrality. To date, there is no consensus among economists with respect to this relationship. Many studies find evidence favorable to a full adjustment of nominal rates of interest to changes in (expected) inflation resulting in no long-run effects on real interest rates consistent with long-run super-neutrality. But a greater number find that the response of nominal interest rates to changes in inflation are insufficient to preclude effects on real interest rates and by extension other real variables. This study uses two new estimators of the long-run Fisher effect that have important advantages over previous estimators employed. The most important of these are the increased power and efficiency associated with the using a cross-section of Fisherian relationships from industrialized economies. The evidence is most consistent with a full Fisher effect supporting long-run super-neutrality. ”When to the sessions of sweet silent thought I summon up remembrance of things past, I sigh the lack of many a thing I sought” William Shakespeare, Sonnet 30