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- Title
Fisher's Paradox: Reply.
- Authors
Carmichael, Jeffrey; Stebbing, Peter W.
- Abstract
In his comment on the authors' article "Fisher's Paradox and the Theory of Interest," economist Patrick Honohan argues that the use of first differences in their preferred equations leads them to seriously underestimate the potential errors-in-variables bias under Fisher's hypothesis they reported, the use of the Consumer Price Index (CPI) may make this potential bias even bigger, and the implicit rate of return on holding money need not be independent of the expected rate of inflation. The authors say that the latter two points are quite trivial. With respect to the second point, all price series in Australia are highly correlated, this includes their rate of change and the change in their rate of change. Consistent with this observation, the authors tested several alternative price series and found the results to be invariant to the particular series chosen. The authors did not test alternative series for the U.S. Given that all empirical tests of Fisher's hypothesis using U.S. data use the CPI, the onus would appear to be on Honohan to establish that the CPI is not a suitable index of prices, and that its use biases the results in a systematic way.
- Subjects
UNITED States; FISHER effect (Economics); INTEREST rates; PRICE inflation; PRICE inflation &; taxation; CONSUMER price indexes; EFFECT of inflation on interest rates; HONOHAN, Patrick
- Publication
American Economic Review, 1985, Vol 75, Issue 3, p569
- ISSN
0002-8282
- Publication type
Article