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Changes in persistence, spurious regressions and the Fisher hypothesis

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Author Info

  • Robinson Kruse

    ()
    (Leibniz University Hannover and CREATES)

  • Daniel Ventosa-Santaulària

    ()
    (Centro de Investigación y Docencia Económicas, CIDE)

  • Antonio E. Noriega

    ()
    (Banco de México)

Abstract

Declining inflation persistence has been documented in numerous studies. When such series are analyzed in a regression framework in conjunction with other persistent time series, spurious regressions are likely to occur. We propose to use the coefficient of determination R2 as a test statistic to distinguish between spurious and genuine regressions in situations where time series possibly (but not necessarily) exhibit changes in persistence. To this end, we establish some limit theory for the R2 statistic and conduct a Monte Carlo study where we investigate its finite-sample properties. Finally, we apply the test to the Fisher equation for the U.S. and Mexico. Contrary to a rejection using cointegration techniques, the R2-based test offers strong evidence favourable to the Fisher hypothesis.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2013-11.

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Length: 22
Date of creation: 04 Nov 2013
Date of revision:
Handle: RePEc:aah:create:2013-11

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Web page: http://www.econ.au.dk/afn/

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Keywords: Changes in persistence; Spurious regression; Fisher hypothesis.;

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