There is a market-required real, after-tax yield on all assets in relation to which gold, stocks and bonds are valued that is anchored on long term real per capita productivity growth (a type of heretofore undiscovered Fisher Effect
in asset yields).
The Fisher Effect maintains that the nominal interest rate is a function of the real interest rate and the inflation rate.
The International Fisher Effect is based on the Fisher Effect and indicates that a change in the interest rate differential between any two countries will objectively help to predict future movements in the spot exchange rate.
Empirical findings obtained from this approach are abundant but inconclusive thus far; see Cooray (2003) and Johnson (2006) who provide excellent overviews of the theoretical and empirical issues on the Fisher effect.
In this matter, the fact that the ADF-GLS test provides evidence in favor of the Fisher effect for most countries in the sample but the ADF test does not is in accordance with previous discussion in the literature that the ADF-GLS test has more power than the ADF test in detecting stationarity (Ng and Perron, 2001; Rapach and Wohar, 2002).
Here if the interest and inflation variables are nonstationary and have the same level of unit root structure (mostly I(1)), they may co-move together, establishing a long run common trend and in the process uphold the Fisher Effect
Secondary issues examined include interest-rate changes in the economy overtime and the Fisher Effect
Even if the Fisher relation does hold, it is unlikely that the Fisher effect
will be one-for-one, as implied by defining the real interest rate from the simple Fisher equation.
The International Fisher Effect
(IFE) theory is an important concept in the fields of economics and finance that links interest rates, inflation and exchange rates.
Since inflationary expectations influence nominal interest rate, the Fisher effect
has far-reaching implications for debtors and creditors as well as for the effectiveness of monetary policy and efficiency in banking sector.
Seigniorage, debasement, the quantity theory of money, the Fisher effect
, hyperinflation, the Phillips curve, etc.
Cointegration, Error Correction and the Fisher Effect
," Applied Economics, December 1989, 1611-20.