Data indicate that the Fisher effect:
A) holds in the short run.
B) holds in the long run.
C) holds in the long run and the short run.
D) doesn't hold in the short run but holds in the long run.

Question

Quizplus · Accepted Answer

The Fisher effect posits that changes in expected inflation should be fully reflected in nominal interest rates. However, in the short run, other factors such as changes in real interest rates and risk premiums can affect nominal interest rates, leading to deviations from the Fisher effect. In the long run, however, these other factors are assumed to be constant, and the Fisher effect should hold. Empirical evidence suggests that the Fisher effect does not hold in the short run but holds in the long run, supporting choice D.

Data Indicate That the Fisher Effect