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Published online by Cambridge University Press: 24 July 2020
The Fisher effect, that is, the theoretical prediction that nominal interest rates should adjust to changes in inflation expectations has been the subject of a variety of empirical studies. Chapter 9 has already presented evidence on this hypothesis with newer data. Interestingly, this theoretical proposition has not fared well for the historical data that Fisher (1930) himself studied. Irving Fisher found for the USA that the adjustment of interest rates takes about 20 years and even then is only partial. Furthermore, nominal interest rates for various countries, according to Fisher, do not adjust one-to-one to changes in inflation as witnessed by the fact that real rates of interest are lower in times of high inflation than in times of low inflation. Researchers after Fisher have largely confirmed this finding.1 A particularly interesting historical episode – from 1869 to 1913, under the gold standard – even suggests an outright contradiction of the Fisher hypothesis as we will explain. It is to these intriguing findings that this chapter turns.
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