Maruti Suzuki Business Intelligence and Enterprise Databases

Topics: Monetary policy, Central bank, Interest rate Pages: 3 (824 words) Published: December 16, 2012
III. Empirical work of Fisher Effect to developed countries
The past several decades have seen numerous empirical studies of the Fisher equation. As was briefed earlier, when the expected inflation rises then the interest rates will rise while leaving the real interest rate unchanged. This assumption was been named as Fisher Effect. Long-run Fisher effect is empirically verified while short-run fisher effect is not empirically verified since in the long-run nominal interest rates fully respond to movements in inflation. Most cases of Fisher Effect occured in the developed country and least in the developing country because in the developed countries Fisher Effect hypothesis tend to have higher and more volatile levels of inflation. Crowder and Hoffman (1996) found that in the USA 1 percent increase in inflation yields 1.34 percent increase in the nominal interest rate. Recently we found the news on 22 September 2011 reported that US Federal Reserve recast the Fed's $2.65 trillion securities portfolio in an effort to reduce long-term interest rates. This decision has been made by Federal Reserve Chairman Ben Bernanke. The Fed plans to shift its holdings so it will have more long-term U.S. Treasury bonds and more mortgage debt than previously planned. It hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector. The decision came with many controversion against it. Three out of ten voting Fed officials opposed the decision bacause they were worried about the future infaltion while the seven others said that the infaltion seems to have moderated and expected inflation remain stable. Those three regional Federal Reserve bank presidents were Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia, they afraid that if the inflation does increase then the Fed will ashame because they lose in its own portfolio since the Fed wanted to have more long-term US...
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