The Relationship between Interest Rates and Inflation: Examining the Fisher Effect in China

Abstract

This study revisits the Fisher effect using a different empirical method that considers a potential nonlinear relationship between interest rates (treasury bond rates) and inflation in China. The rising uncertainty and asymmetric information in financial markets between bond holders and bond issuers suggest such a potential nonlinear relationship. To this aim, we apply Shin et al.’s (2014) nonlinear autoregressive distributed lag (NARDL) model with asymmetric dynamic multipliers for the sample period 2002M7–2018M4. The empirical findings reveal symmetric and asymmetric partial Fisher effects for all sample bond rates in China. Furthermore, we find that 20-year bond rates experience the lowest partial Fisher effect.

Keywords

Fisher effect / nonlinear autoregressive distributed lag (NARDL) model / asymmetric dynamic multipliers / China / treasury bonds / inflation / interest rates

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2020 Higher Education Press