The Fisher effect and Australian interest rates

Abstract

The Fisher hypothesis states that price inflation is fully reflected in nominal interest rates, implying that the underlying real rate is constant. This hypothesis is tested for Australian short and long-term interest rates using the Johansen methodology of cointegration testing, on both a pre- and post-tax basis. It is found that while the Fisher effect fails prior to the financial deregulation of the 1980s, there is evidence following deregulation that the relationship is restored.