FISHER HYPOTHESIS AND THE ROLE OF EXPECTATIONS

The aim of this study is to test the long run validity of the Fisher hypothesis for Turkish economy according to the rational expectations model by using real variables. The essential difference in variable choice originates from the role of expectations. In the current literature, the test of the Fisher hypothesis is implemented by the use of nominal intrerest and inflation rates. But the sophisticated economic agents with rational expectations take their economic decisions according to real variables rather than nominal variables without being entangled by the “veil of money.” In this sense, the model in which nominal variables are used is in fact a model that accepts the money illusion hypothesis in accordance with adaptive expectations. In case of rational expectations model, the real variables are to be used. The “new” approach of our paper is that we’ve taken into consideration the role of expectaions on Fisher hypothesis. The results of cointegration test indicate the existence of a long run economic equilibrium between real interest rates and expected value of money.