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The Fisher Effect and The Long–Run Phillips Curve --in the case of Japan, Sweden and Italy --

Author

Listed:
  • Miyagawa, Shigeyoshi

    (Kyoto Gakuen University, Department of Economics)

  • Morita, Yoji

    (Kyoto Gakuen University, Department of Economics)

Abstract

The object of the paper is to attempt to assess the two classical long-run neutrality; the Fisherian link between inflation rate and nominal interest rate, and the natural rate hypothesis proposed by Friedman(1968) and Phellps (1967, 1968). We use the quarterly data for Japan, Sweden and Italy. In order to investigate the classical long-run neutrality, we use the non-structural bivariate autoregressive methodology King and Watson (1997) developed to avoid the Lucas-Sargent critique. They showed that long-run neutrality can be tested with limited structural information when nominal variables are integrated. We pay close attention to the unit root properties of the data, since it takes very crucial role in applying their methodology. Our test results show that all data of Japan, Sweden and Italy we use here do not have unit root and cointegration. The empirical evidences of the Fisherian link and the long-run Phillips curve in Japan, Sweden and Italy are consistent with those of United States by King and Watson (1997). The classical Fisherian link which means that permanent shift in inflation rate will have no effect on real interest rate would not be accepted. On the contrary, we could find little evidence against the vertical long-run Phillips curve. A long-run trade off between inflation and unemployment was rejected.

Suggested Citation

  • Miyagawa, Shigeyoshi & Morita, Yoji, 2002. "The Fisher Effect and The Long–Run Phillips Curve --in the case of Japan, Sweden and Italy --," Working Papers in Economics 77, University of Gothenburg, Department of Economics, revised 27 Mar 2003.
    • Handle: RePEc:hhs:gunwpe:0077
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    File URL: http://hdl.handle.net/2077/2832
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    References listed on IDEAS

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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Robert G. King & Mark W. Watson, 1997. "Testing long-run neutrality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 69-101.
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    7. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
    8. Koustas, Zisimos & Serletis, Apostolos, 1999. "On the Fisher effect," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 105-130, August.
    9. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76(4), pages 678-678.
    10. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
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    Cited by:

    1. Kryzanowski, Lawrence & Rahman, Abdul H., 2009. "Generalized Fama proxy hypothesis: Impact of shocks on Phillips curve and relation of stock returns with inflation," Economics Letters, Elsevier, vol. 103(3), pages 135-137, June.
    2. R. Santos Alimi, 2014. "ARDL Bounds Testing Approach to Cointegration: A Re-Examination of Augmented Fisher Hypothesis in an Open Economy," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 2(2), pages 103-114, June.
    3. Muse, Bernard & Alimi, R. Santos, 2012. "Testing an Augmented Fisher Hypothesis for a Small Open Economy: The Case of Nigeria," MPRA Paper 44987, University Library of Munich, Germany.
    4. Awomuse, Bernard O. & Alimi, Santos R., 2012. "The Relationship between Nominal Interest Rates and Inflation: New Evidence and Implication for Nigeria," MPRA Paper 49684, University Library of Munich, Germany.

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    More about this item

    Keywords

    long-run neutrality; unit root; cointegration;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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