An ARDL Approach Test Of Fisher Effect In China

Fisher effect means that real interest rates is to remain constant in the long run, it will not be affected by expected inflation, therefore leading to one-to-one relationship between the expected inflation rate and the nominal interest rate. Thus, to test if there is Fisher effect in an economy is practical significance on the formulation and implementation of monetary policy and other relevant policies and on sound financial system. Empirical studies scholars analyze the relationship between nominal interest rates and inflation based on different econometrics methods, different countries, different periods, etc, and their conclusions are different. Forming so called "the puzzle of the Fisher Effect". As a result, testing the Fisher effect has became a hot spot in the field of financial and economics both from the theoretical and empirical.This paper clarifies that the efficacy of unit root test in testing non-stationary time series are limited. Moreover, the unit root test results of nominal interest rate and inflation rate are also different when use different unit root test methods. There is at least some degree of uncertainty over whether the nominal interest rates and inflation rate series contain a unit root and therefore a degree of uncertainty over the maintained assumption made by most of the recent literature testing the long-run Fisher effect. Therefore, We investigate the empirical validity of the long-run Fisher effect using a technique capable of testing for the existence of a long-run relationship regardless of whether the underlying time series are individually I(0) orI(1).Based on the analytical framework of an ARDL bounds test, the conclusion is that:at present, there is only partial Fisher effect in China. The nominal interest rates and inflation do not establish a one-to-one relationship as postulated by Fisher. It is most likely due to the Non-neutrality of Money in China. Overall, the Fisher effect coefficients were0.729and0.380corresponding to Interbank offered rate and Loan interest rates respectively, indicate the existence of a significant partial Fisher effect. The relationships between the nominal interest rate and the inflation rate may be change under different economic backgrounds and exogenous shocks. First, the early days of the market economic system reforms lack of effective demand, the Fisher effect does not exist in China. Second, the emergence of serious inflation in the economy in1993, Fisher effect also does not exist, and making it difficult to use monetary policy to curb inflation. Third, by the end of1995to mid-1997, there is only a long-term equilibrium relationship between the Interbank offered rate and the inflation rate, the coefficient is0.163. So it is difficult to limit inflation continued to decline by adjust monetary policy timely, and to prevent economic downturn. Fourth, after the Asian financial crisis, there is partial Fisher effect in China, and the Fisher effect coefficients were0.603and0.453respectively. Therefore expansionary monetary policy can alleviate the prevailing deflationary situation, but it takes a long time to be effective. Fifth, from2003to early2007, there is a risk of excess liquidity in our economic, although there are inflation expectations, but the Central Bank did not Strength the macro-economic control, however, our results do not support Fisher effect. Finally, after the outbreak of the global financial crisis, the Fisher effect coefficients were0.286and0.262respectively, which indicates that the macro-economic control are more difficult to achieve the control objectives, therefore, tighten macro-economic control and coordinated action together with other macroeconomic policies is inevitable. Thus, we should advance to promote the interest rate market-oriented reform, and strengthening coordination between monetary policy and fiscal policy. Then joint effort to regulate the operation of macro-economy, and compensate for the lack of monetary policy.The results of error correction model analyze do not support short-term Fisher effect whether in the entire sample, or the various sub-samples because the short-term dynamic coefficient between nominal interest rates and inflation rates are small and insignificant. That is to say, monetary policy for Macro-economic Control does not produce immediate results.