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Panel cointegration tests of the Fisher effect

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Author Info
Joakim Westerlund (Department of Economics, Lund University, Lund, Sweden)
Abstract

Most empirical evidence suggests that the Fisher effect, stating that inflation and nominal interest rates should cointegrate with a unit slope on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. For this purpose, we propose two new panel cointegration tests that can be applied under very general conditions, and that are shown by simulation to be more powerful than other existing tests. These tests are applied to a panel of quarterly data covering 20 OECD countries between 1980 and 2004. The evidence suggest that the Fisher effect cannot be rejected once the panel evidence on cointegration has been taken into account. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.967
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File URL: http://qed.econ.queensu.ca:80/jae/2008-v23.2/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 23 (2008)
Issue (Month): 2 ()
Pages: 193-233
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Handle: RePEc:jae:japmet:v:23:y:2008:i:2:p:193-233

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
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    Other versions:
  4. Owen, P Dorian, 1993. "Cointegration Analysis of the Fisher Hypothesis: The Role of the Real Rate and the Fisher Identity," Applied Financial Economics, Taylor and Francis Journals, vol. 3(1), pages 21-26, March. [Downloadable!] (restricted)
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  17. Westerlund, Joakim, 2005. "New Simple Tests for Panel Cointegration," Working Papers 2005:8, Lund University, Department of Economics.
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    Other versions:
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    Other versions:
  26. Anindya Banerjee & Josep Lluís Carrion-i-Silvestre, 2006. "Cointegration in Panel Data with Breaks and Cross-Section Dependence," Economics Working Papers ECO2006/5, European University Institute. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gengenbach, Christian & Urbain, Jean-Pierre & Westerlund, Joakim, 2008. "Panel Error Correction Testing with Global Stochastic Trends," Research Memoranda 051, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  2. Andreas Beyer & Alfred A. Haug & William G. Dewald, 2009. "Structural Breaks, Cointegration and the Fisher Effect," Working Paper Series 1013, European Central Bank. [Downloadable!]
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