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Taylor Principle Supplements the Fisher Effect: Empirical Investigation under the US Context

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  • Mohammed Saiful ISLAM

    (Department of Economics, University of Chittagong)

  • Mohammad Hasmat ALI

    (Department of Finance and Banking, University of Chittagong)

Abstract

This paper reviews the short- and long-run dynamics of interest rate and inflation of the United States. Basing upon quarterly as well as monthly data over the period 1957 to 2010, we find evidence that interest rate behaviour of the Federal Reserve is consistent with the Taylor principle in short run and with the Fisher hypothesis in long run. Entire sample justifies the existence of a long run cointegrating relationship between federal funds rate and inflation characterised as the Fisher effect. When data are split into different subsamples, the cointegrating relationship disappears. Interest rate dynamics of pre-1980 and post-2001 neither track Fisher hypothesis nor Taylor principle, rather represent substantial discretion.

Suggested Citation

  • Mohammed Saiful ISLAM & Mohammad Hasmat ALI, 2012. "Taylor Principle Supplements the Fisher Effect: Empirical Investigation under the US Context," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(1), pages 189-203, June.
    • Handle: RePEc:rom:econmn:v:15:y:2012:i:1:p:189-203
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    References listed on IDEAS

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    More about this item

    Keywords

    Fisher Effect; Monetary Policy; Taylor Principle.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other

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