The Fisher effect in Europe: A first approach

This research studies the existence of the Fisher Effect in Europe along the period 1997-2012 with a very easy test, to verify if the majority of nominal interest rates changes are caused by inflation rate movements, remaining constant the real interest rate. Also, we split our sample into two different periods: a first “expansion” period (1997-2007) and a second “crisis” period (2008-2012). Estimates of inflation expectations and nominal interest rates were extracted from the Eurostat database.

We find a positive and significant relationship between variations in the current expected inflation rate and variations in nominal interest rates for the whole of Europe, increasing the Fisher Effect in the crisis period. This pattern is the same for Germany, Spain and Finland. Considering only the Eurozone countries, the Fisher Effect occurs only in the crisis period. This phenomenon happens too for Austria, Slovenia, Slovakia, Italy and Portugal. In Latvia, Hungary and Netherlands, the Fisher Effect takes place only in the crisis period but in the opposite way.

Differences between countries can be motivated by spreads of the inflation rates. One potential explanation of these phenomena could be a lack of liberalization or competition in some sectors of these countries, in the sense that firms in those industries are able to easily transmit inflation shocks to their output prices. According to some hypotheses, these facts could also have consequences on the impact of changes of nominal interest rates on company stock prices. In short, these hypotheses suggest that when changes in interest rates are due to changes in the expected inflation and simultaneously firms are capable of passing on these inflation shocks to their output prices (and thus to nominal revenues and profits), the impact of these interest rate changes on stock prices should be minimal.