The Fisher Equation Controversy: A Reconciliation of Contradictory Results

Abstract

where r is the real interest rate. Assuming that the real interest rate is constant, the above equation yields the Fisherian prediction of co plete adjustment (di/diT = 1). Fisher's empirical findings, however, indicated only a partial adjustment of nominal interest rates to inflation expectations. The contradiction between Fisher's theoretical and e pirical findings was confounded further by Mundell [11] and Tobin [19] who provided theoretical results consistent with Fisher's empirical finding of partial adjustment. The fascination with deriving theoretical results consistent with Fisher's empirical finding continues. Sargent [14; 15; 16], Visco [20] and Fried and Howitt [8] have all attempted to provide theoretical justification for the partial adjustment result.