A note on nonstationarity, structural breaks, and the Fisher effect

We find empirical evidence that inflation, nominal, and real interest rates in the US are trend-stationary with a structural break in both the unconditional mean and the drift rate of a deterministic trend, which occurs shortly after the change in operating procedures of the Fed in September 1979. This finding casts some doubts on cointegration tests of the long-run Fisher effect conducted in recent studies, since the results of these tests can be affected by the existence of common structural breaks in the series. We propose an alternative test of the Fisher effect, based on a VAR representation in appropriately detrended variables. We find strong support for the Fisher effect both in the medium term and in the long term. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: E43; G12; C22.