NON-STATIONARITY AND TAX EFFECTS IN THE LONG-TERM FISHER HYPOTHESIS

The long-term Fisher hypothesis under rational expectations and consta nt ex ante real rates is tested using Danish data covering the post Wo rld War II period. The analysis takes into account that interest rates and inflation rates are non-stationary processes, integrated of order one. In addition, the issue of whether interest rates should be measu red in pre-tax or after-tax terms is addressed. The results show stron g support for the Fisher hypothesis once interest rates are stated in after-tax terms. The cross-equation restrictions implied by the hypoth esis on a particular VAR model are not statistically rejected, and the long-term after-tax interest rate appears to be a very useful forward -looking predictor of future long-term inflation.