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ahu, Jha and Meyer (1990), Hsing (1997) and Olekalns (1996) observe that the contradictory nature of empirical tests of the Fisher effect is a result of variation in methodologies and data used. With the Fisher equation containing unobservable parameter estimates such as expected rates of inflation, Sahu, Jha and Meyer (1990) emphasize that the robustness of tests of the fisher effect clearly depend upon the choice of proxy used. Nusair (2009) extends his previous study by investigating reasons why previous studies have failed to show support of the Fisher effect. Nusair (2009) claims that the reasoning behind the failures is due to the assumption that adjustments between nominal interest rates and inflation occur at a constant rate, and represent a linear relationship, when this is not the case in most inflation-targeting economies. Similarly, Christopoulos and Leon-Ledesma (2007) in their analysis of quarterly US nominal interst rates and CPI inflation rate are able to find a non-linear cointegrating relationship between the two. They apply Monte Carlo simulations to the data and results indicate that the nonlinearites are a key factor in obtaining a less than one-for-one relationship in the Fisher relation. Fisher (1930) himself is unable to empirically prove his theorized ‘one-for-one' relationship in his study of US nominal rates of interest and inflation, only managing to attain correlation coefficients of a little less than one, and subsequently only moderately satisfying his hypothesis. One explanation for this, relates to the theory of money illusion. Money illusion can be described as the inability of agents to differentiate between changes in real and nominal variables. In a practical context, changes to the inflationary expectations of agents would not be fully accounted for in their intertemporal decision making, and subsequently not passed on through to nominal interest rates. Another explanation is based on ideas presented by Mundell (1963) and Tobin (1965). Mundell (1963) states that as the rate of inflation rises consumer purchasing power is likely to decrease, and subsequently lead to a fall in real interest rates. Tobin (1965) puts forward the idea that as inflation rates rise, there is a greater opportunity cost for agents who hold cash money, this leads to a fall in the amount of cash balances held and to a rise in the amount of holdings of real capital. The incorporation of these two school of thoughts is more widely known as the Mundell-Tobin effect, and offer an explanation as to why nominal rates of interest rise by a factor smaller than one, in response to changes in inflation.
Studies by Mishkin (1992), Hawtrey (1997), and Monnet and Weber (2001) have cited that the form, strength and efficiency of a country's monetary policy is reflected in the ability of changes to expected inflation to transmit through to nominal interest rates. With the effectiveness of monetary policy being a key motivation behind investigation of the Fisher effect, a significant study by Soderland (2001) shows that when the combination of an inflation-targeting outline, and an active monetary policy exist, the strength of the Fisher effect is reduced.

Darby (1975) and Feldstein (1976) take into account the impact of taxes on the relationship between nominal interest rates and expected rates of inflation. Darby (1975) asserts that a premium should be included to ensure constant real interest rates and emp