The Fisher hypothesis and the forecastability and persistence of inflation

Abstract

For the period 1860 to 1939, the simple correlation of the U.S. commercial paper rate with the contemporaneous inflation rate is -0.17. The corresponding correlation for the period 1950 to 1979 is 0.71. This paper attributes this apparent change in the Fisher relation to differences in the stochastic process of inflation, rather than a change in any structural relationship between interest rates and expected inflation. Contrary to recent claims in the literature, there is little evidence of inflation non-neutrality in data from the pre-World War I period.