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Structural breaks, cointegration and the Fisher effect

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  • Beyer, Andreas
  • Haug, Alfred A.
  • Dewald, William G.

Abstract

There is scant empirical support in the literature for the Fisher effect in the long run, though it is often assumed in theoretical models. We argue that a break in the cointegrating relation introduces a spurious unit root that leads to a rejection of cointegration. We applied new break tests and tested for nonlinearity in the cointegrating relation with post-war data for 15 countries. Our empirical results support cointegration, after accounting for breaks, and a linear Fisher relation in the long run. This is in contrast to several recent studies that found no support for linear cointegration. JEL Classification: E43, C32

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Paper provided by European Central Bank in its series Working Paper Series with number 1013.

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Date of creation: Feb 2009
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Handle: RePEc:ecb:ecbwps:20091013

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Keywords: Fisher effect; linear and nonlinear cointegration; Structural change;

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Cited by:
  1. Jochmann, Markus & Koop, Gary, 2011. "Regime-Switching Cointegration," SIRE Discussion Papers 2011-36, Scottish Institute for Research in Economics (SIRE).
  2. Mohammed Saiful ISLAM & Mohammad Hasmat ALI, 2012. "Taylor Principle Supplements the Fisher Effect: Empirical Investigation under the US Context," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(1), pages 189-203, June.

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