Does the fisher effect apply in Greece? A cointegration analysis

Abstract

In this paper we tested the joint hypothesis of the Fisher effect and rationality of inflation expectations
in Greece during the period 1980:I - 1996:II applying cointegration technique.
The basic evidence of this paper is the invalidity of the Fisher relationship as a long-run equilibrium
phenomenon in the case of the Greek Economy. This means that the nominal interest rate does not follow
the interest rate changes over the long-run. Inflationary movements have not been totally absorbed by
nominal interest rates and as consequence the Fisher effect is not valid. This failure implies that external
factors play a direct role in the determination of the domestic interest rate, something which is reasonable
for an open economy, such as the Greek economy, where capital flows are not prohibited.