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Changes in persistence, spurious regressions and the Fisher hypothesis

Author

Listed:
  • Kruse Robinson

    (CREATES, Aarhus University, Department of Economics and Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark)

  • Ventosa-Santaulària Daniel

    (Centro de Investigación y Docencia Económicas, CIDE , Carretera México-Toluca 3655, Col. Lomas de Sta Fe, Del. Álvaro Obregón, México D.F, C.P. 01210, México)

  • Noriega Antonio E.

    (Banco de México, Dirección General de Emisión, Legaria 691, Col. irrigación, México D.F., México)

Abstract

Declining inflation persistence has been documented in numerous studies. We show that when time series with changes in persistence are analyzed in a regression framework with other persistent time series like interest rates, spurious regressions are likely to occur. We propose the coefficient of determination R2 as a simple test statistic to distinguish between spurious and genuine regressions in situations where time series possibly exhibit changes in persistence. We extend the analysis towards fractional (co-)integration as well. To this end, we establish the limit theory for the R2 statistic and conduct a Monte Carlo study where we investigate its finite-sample properties. The test performs remarkably well in terms of size and power and is robust to level shifts and multiple changes in persistence. Finally, we apply the test to the Fisher equation for the United States. The newly proposed R2-based test offers robust evidence favourable to the Fisher hypothesis.

Suggested Citation

  • Kruse Robinson & Ventosa-Santaulària Daniel & Noriega Antonio E., 2017. "Changes in persistence, spurious regressions and the Fisher hypothesis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(3), pages 1-28, June.
    • Handle: RePEc:bpj:sndecm:v:21:y:2017:i:3:p:28:n:1
    DOI: 10.1515/snde-2015-0062
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    1. Kruse Robinson & Ventosa-Santaulària Daniel & Noriega Antonio E., 2017. "Changes in persistence, spurious regressions and the Fisher hypothesis," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(3), pages 1-28, June.

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    More about this item

    Keywords

    Fisher hypothesis; inflation; spurious regression; structural breaks;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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