The Inverted Fisher Effect: More Evidence

As a central principle in modern interest rate theory, the Fisher Effect (1986) posits that nominal interest rates will rise by roughly the expected rate of inflation, and the real rate of interest will remain constant. It is hypothesized that, on a period-by-period basis, movements in expected inflation are reflected partially as an increase in nominal aftertax rates and partially as a decrease in real, aftertax yields, as suggested by Fisher. Survey-based expected inflation data are used to obtain empirical results that indicate that variation in anticipated inflation over time depresses real, aftertax rates but by far less than a negative one-for-one relationship. These results are interpreted as evidence against the inverted Fisher Hypothesis and supportive of Fisher's belief that movements in expected inflation would affect both nominal and real interest rates in the short run.