Go to the St. Louis Federal Reserve FRED database, and find
data on the 1-Year Treasury Rate (GS1)...

Question

Go to the St. Louis Federal Reserve FRED database, and find
data on the 1-Year Treasury Rate (GS1) and the GDP Deflator price index
(GDPDEF). For (GS1), choose the frequency setting as “quarterly”; for (GDPDEF),
set the units setting to “Percent Change From Year Ago"; and download both
data series. For the questions below, assume inflation is a good proxy for
inflation expectations. 

a) From the current period of data available, compare
inflation and the interest rate to what it was in 2005:Q1. Does the Fisher
effect hold? Why or why not? 

b) From the current period of data available, compare
inflation and the interest rate to what it was in 1980:Q1. Does the Fisher
effect hold? Why or why not? 

c) (Advanced) Use the “scatterplot” function in Excel to
create a scatterplot of inflation on the horizontal axis and the interest rate
on the vertical axis. Use data from 1954:Q1 to the current available data. On
the scatterplot, graph a fitted (regression) line of the data (there are
several ways to do this; however, one chart layout has this option built in).
Based on the fitted line, does the Fisher effect hold? Explain.

Komalavalli · Accepted Answer

Irvin Fisher Effect:
Fisher states that there exists a negative relationship between interest rate and inflation rate.
a)
From above graph we can infer that there exist a positive relationship between interest rate and inflation rate during recession after that there was a negative relationship. We can conclude during economic downturn Fisher effect is not applicable and also after 2020 fisher effect is not applicable for our current economic condition.
b)
From below graph we can say that Fisher effect doesn’t hold from 1980 till great recession, aftermath Fisher effect holds till the outbreak of Corona virus after this effect doesn’t hold.
c)
Based on the fitted line the fisher effect doesn’t hold because regression indicates that there exist a positive relationship between interest rate and inflation.
Reference:
Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 1-Year Constant Maturity, Quoted on an Investment Basis [GS1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GS1, October 6, 2022.
U.S. Bureau of Economic Analysis, Gross Domestic Product: Implicit Price Deflator [GDPDEF], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPDEF, October 6, 2022.
Interest rate vs Inflation	1.12727	1.0138899999999993	0.72614000000000034	0.81452000000000002	0.96331999999999962	1.2924500000000001	1.8674899999999999	2.5949999999999998	3.1418300000000001	3.3256399999999986	3.8956699999999977	3.2901799999999999	3.6672400000000001	3.7769300000000001	3.1008800000000001	2.7589299999999999	2.4666999999999986	2.0507599999999986	2.0638000000000001	2.47736	1.6173199999999999	1.4761500000000001	1.2514599999999998	1.1719199999999999	1.3406	1.44245	1.4003899999999998	1.2978299999999994	1.11145	1.09056	1.0027599999999999	1.0237699999999994	1.3262400000000001	1.2575999999999994	1.2068199999999998	1.09636	1.0199899999999993	1.0300800000000001	0.95747000000000004	1.5651599999999999	1.4415799999999994	1.4973199999999998	1.7629599999999999	1.4082899999999998	1.5936899999999998	1.82538	1.8181799999999999	2.04895	2.1972999999999998	2.5593300000000001	3.1502699999999986	3.3073100000000002	3.0699299999999998	2.7593000000000001	2.7492000000000001	3.02867	3.7365599999999985	4.3006200000000003	4.3234099999999973	4.6321499999999975	4.5555799999999973	4.7797300000000025	5.2209199999999969	5.0931499999999996	5.4823000000000004	5.6091199999999972	5.0004799999999996	5.0369299999999999	5.1503799999999975	5.0655799999999971	5.2725900000000001	4.76363	4.7684999999999995	4.05382	3.9910899999999985	4.4431000000000003	4.0651799999999971	5.0108099999999975	6.0424099999999985	6.79575	7.5709099999999996	8.4453600000000009	9.4876100000000001	10.505880000000005	10.924819999999999	9.9765500000000067	8.7341799999999985	7.3955699999999975	6.1181699999999974	5.6155399999999966	5.122239999999997	5.2473200000000002	5.8236999999999997	6.2463899999999999	6.1667499999999995	6.5491700000000002	6.38727	6.9138200000000003	7.4208699999999999	7.30185	7.6887699999999999	8.2583299999999991	8.

Go to the St. Louis Federal Reserve FRED database, and find data on the 1-Year Treasury Rate (GS1) and the GDP Deflator price index (GDPDEF). For (GS1), choose the frequency setting as “quarterly”;...

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