Empirical Testing of International Fisher Effect in United States and Selected Asian Economies



Abstract: The relationship between the nominal interest rates and the expected inflation is of crucial importance in financial markets. The Fisher effect postulated that real interest rate is constant and that nominal interest rate and expected inflation move one-for-one together.  The paper examines the existence of International  fisher effect for  United States and selected Asian countries like-India,Korea and Japan, by regressing interest rates differential  on inflation rate differential during the period ,2001:Q1 to2012:Q2. The estimated slope coefficients in regressions of nominal interest rates differential on expected inflation rates differential are significantly different than the theoretical value of unity as is evident in our study.  The finding lends support to the existence of partial fisher effect in USA because both interest rates and inflation rate move in positive direction but do not move with one-for-one. But in case of India, Japan and Korea, there do not exist any signs of International Fisher Effect. When each country is treated interchangeably as home country and foreign country to show the direction of International fisher Effect, the result shows mixed picture. The theory holds when some countries were used as home country but was disproved when they were used as foreign countries. In a nut shell, the study suggests that it finds evidence of a positive long run relationship between interest rate and inflation rate for the countries undertaken in our study but the notion of a full International Fisher Effect is rejected.


Keywords: Inflation rates, interest rates, International Fisher Effect, Cointergration.

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