Combined Tests of The Fisher and Expectation Hypothesis

Abstract

The role played by in inflationary expectations in the detennination of nominal rates of interest is evaluated within the framework of the Fischer and Expectation Theory of the term structure of interest rates for Argentina during the period June 1977 - June 1982. The Fisher Hypotesis is utilized to provide a decomposition of a n-period nominal interest rate into the average of expected changes in the inflation rate an of the ex-ante real rate of interest. Furthermore, economic agents are assumed to fonn rational expectations on the exogenous variables of the economy. This latter assumption together with the Fisher and Expectations Hypotesis imply a set of nonlinear restrictions among the parameters of the model utilized to approximate the way in which those expectations are formed. The nonlinear restrictions are evaluated by means of the Wald test wich only requires estimation of the unrestricted model. The tests conducted do not reject, in almost all cases, the hypothesis, whether both hypothesis are simultaneously or separately held.