The Fisher Puzzle, Real Rate Anomaly, and Wicksell Effect

We study the relationships between interest and inflation rates using a recursive equation approach that takes into account both Fisher and Wicksell effects. Extending previous work, a state space representation is used to estimate time-varying ex post Fisher and Wicksell equation effects. We subsequently recover ex ante interest and inflation rate series. Using these ex ante rate series, we estimate an ex ante Fisher equation, including both time-varying intercept estimates of the ex ante real interest rates and time-varying Fisher coefficients. Our results for the U.S. and three other countries support the Fisher propositions after taking into account Wicksell effects