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- Title
Fisher's Paradox: Comment.
- Authors
Honohan, Patrick
- Abstract
In their article "Fisher's Paradox and the Theory of Interest," economists Jeffrey Carmichael and Peter Stebbing examine the correlation between after-tax interest rates and the expected inflation rate. They contrast the Fisher hypothesis, that nominal interest rates move in line with expected inflation, with their own inverted Fisher hypothesis that nominal interest rates on financial assets are uncorrelated with expected inflation. The main evidence adduced by Carmichael and Stebbing is a regression equation relating changes in interest rates to subsequent changes in the rate of inflation. In these equations, the rate of inflation is thought of as a proxy for the expected rate of inflation. A natural reaction would be to conclude that the change in subsequent inflation has turned out to be a rather poor proxy for the change in expected inflation. In order to obtain an estimate of this bias, Carmichael and Stebbing assume that changes in inflation are truly a first-order moving average process, and that inflationary expectations are optimal forecasts relative to that process.
- Subjects
FISHER effect (Economics); INTEREST rates; PRICE inflation; PRICE inflation &; taxation; EFFECT of inflation on interest rates; REGRESSION analysis; ASSETS (Accounting); ECONOMIC forecasting
- Publication
American Economic Review, 1985, Vol 75, Issue 3, p567
- ISSN
0002-8282
- Publication type
Article