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Non-linear Co-integration between Nominal Interest Rates and Inflation: An Examination of the Fisher Hypothesis for Asian Countries

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  • Salah Nusair

Abstract

This paper examines the long-run relationship between nominal interest rates and inflation for a group of Asian countries over the period February 1973-April 2007. We argue that the empirical failure to find evidence supporting the Fisher effect in previous studies may be attributed to the presence of non-linearities in the long-run relationship between nominal interest rates and inflation. We present evidence that the Fisher relation contains significant logistic smooth transition autoregression (LSTAR)-type non-linearity. This type of non-linearity is consistent with inflation targeting and the opportunistic behavior of policy-makers. Applying a non-linear unit root test to the residuals obtained from the Fisher relation decisively rejects the null hypothesis of a unit root against the alternative of non-linear but globally stationary in all the cases.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Global Economic Review.

Volume (Year): 38 (2009)
Issue (Month): 2 ()
Pages: 143-159

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Handle: RePEc:taf:glecrv:v:38:y:2009:i:2:p:143-159

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Related research

Keywords: Fisher effect; non-linearity; co-integration;

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Cited by:
  1. Khalid Kisswani & Salah Nusair, 2014. "Nonlinear convergence in Asian interest and inflation rates: evidence from Asian countries," Economic Change and Restructuring, Springer, vol. 47(3), pages 155-186, August.

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