On Some Neglected Implications of the Fisher Effect

Following the lead of Fama [American Economic Review 65 (1975) 269-282] and of other influential papers, such as Mishkin [Journal of Monetary Economics 30 (1992) 195-215], it has become standard to interpret the Fisher effect as the ability of short-term interest rate to predict future inflation. However, in this paper we demonstrate that by restricting to zero the instantaneous response of expected inflation to an interest rate shock, one can identify a disturbance that economic agents, according to the Fisherian framework, should evaluate as transitory. An important implication of this result is that short-term nominal interest rates cannot be interpreted as predictors, at least not long-run predictors, of inflation. We illustrate this result with an empirical application to US postwar data.