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Fisher Hypothesis

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The Non-Stationary and Tax Effects Results of the Fisher Hypothesis Jodi Bob RES 342 September 9, 2010 Paul L. Worthey, MBA, MA.Ed, BSIT The Fisher Hypothesis The long-term Fisher hypothesis relates the long-term nominal interest rate to an expected one period inflation rate. The analysis explores interest rates and inflation and the non-stationary process. The Fisher hypothesis tests the long-term coupon-bearing bonds when presuming nominal interest rates and inflation to be non-stationary stochastic processes. In the article descriptions on the issues of whether interest rates are measuring in pre-tax or after-tax terms. The hypothesis questions the usefulness that interest rates contain regarding future inflation and if it is a concern for policy-makers. Second, it questions whether monetary authorities are good indicators of pressures from inflation on the economy. The paper written in 1975 by Fama on the implications of the Fisher hypothesis expectations has caused several investigations with the relationship between nominal interest rates and expected inflation. Fama’s analysis offered fundamental insight under the assumption that a constant expected real rate and the efficiency that the bond market implies that a one-period nominal interest rate would be a possible indicator of a one-period inflation rate. The methods of this hypothesis were applied to the annual Danish postwar data 1948-1989. The first test was the non-stationary and tax effects in the long term. When using the Hasza-Fuller test the results were highly insignificant. When using the Dickey and Fuller test the results produced highly insignificant augmentation terms. In testing the Fisher hypothesis the estimate of higher order models gives results highly…...

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