Original scientific paper
TESTING THE FISHER EFFECT IN CROATIA: AN EMPIRICAL INVESTIGATION
Manuel Benazić
Abstract
In his celebrated book The Theory of Interest Irving
Fisher asserted that a percentage increase in the
expected rate of inflation would lead to a percentage
increase in the nominal interest rates assuming that
real interest rate is constant. The so-called Fisher
effect suggests that changes in the nominal interest
rate reflect the revised inflation expectations; and
revised inflation expectations have an impact on the
level of the nominal interest rate. Consequently, the
monetary authorities should employ strategies that
will prevent inflation from rising if nominal interest
rates are to be kept at low levels in order to not
discourage the borrowing. The aim of this paper is to
empirically test the Fisher effect in Croatia using VEC
(vector error correction) model. The results suggest
that the “full” Fisher effect in Croatia may de facto
hold only in the long-run. This paper is organized as
follows. Section 2 after the introduction, reviews the
literature. Section 3 reviews used data while Section
4 describes methodology, empirical analysis and the
results. Finally, Section 5 provides some concluding
remarks.
Keywords
the Fisher effect; inflation; interest rate; Croatia; VECM
Hrčak ID:
133122
URI
Publication date:
1.12.2013.
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