Some Empirical Evidence on Models of Fisher Relation

The Fisher relation, describing a one-for-one relation between nominal interest rate and expected inflation, underlies many important results in economics and finance. The Fisher relation is a conceptually simple relation, but the empirical evidence of it is more or less complicated with mixed results. Several alternative models with different implications were proposed in empirical literature for the Fisher relation. We evaluate these alternative models for the Fisher relation based on a post-data model determination method. Our result for data from the U.S. and Korea shows that models with both regimes/periods, a regime with nonstationary fluctuations and the other with stationary fluctuations, fit data best for the Fisher relation.