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The Fisher effect in the EU revisited: new evidence using panel cointegration estimation with global stochastic trends

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  • Rosa Badillo
  • Carmelo Reverte
  • Elena Rubio

Abstract

This article is aimed at verifying the fulfilment of the Fisher hypothesis for a panel of 15 EU countries using the recent developments in the estimation of panel cointegration models with cross-sectional dependence generated by unobservable global stochastic trends (Bai et al., 2009). Bai et al. (2009) propose two iterative procedures that jointly estimate the slope parameters and the stochastic trends. The resulting estimators are referred to, respectively, as Continuously Updated and Bias Corrected (CupBC) and Continuously Updated and Fully Modified (CupFM) estimators. Our results show that, if we ignore the cross-sectional dependence generated by global stochastic trends when estimating the Fisher equation, we could erroneously infer that there is a full Fisher effect, as found by Westerlund (2008) for a panel of OECD countries. However, if we explicitly introduce the common factors in the Fisher equation, the CupBC and CupFM estimators of the slope parameter on inflation are significantly lower than unity, which implies the existence of a 'partial' Fisher effect.

Suggested Citation

  • Rosa Badillo & Carmelo Reverte & Elena Rubio, 2011. "The Fisher effect in the EU revisited: new evidence using panel cointegration estimation with global stochastic trends," Applied Economics Letters, Taylor & Francis Journals, vol. 18(13), pages 1247-1251.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:13:p:1247-1251
    DOI: 10.1080/13504851.2010.532099
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    Cited by:

    1. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.
    2. S, Surayya, 2018. "Alternative Specifications of Fisher Hypothesis: An Empirical Investigation," MPRA Paper 90320, University Library of Munich, Germany.
    3. Yuki Toyoshima & Shigeyuki Hamori, 2011. "Panel cointegration analysis of the Fisher effect: Evidence from the US, the UK, and Japan," Economics Bulletin, AccessEcon, vol. 31(3), pages 2674-2682.

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