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Structural Breaks, Cointegration and the Fisher Effect

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Author Info
Andreas Beyer () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Alfred A. Haug () (Department of Economics, University of Otago, Dunedin, New Zealand.)
William G. Dewald () (Department of Economics, Ohio State University, Columbus, OH 43210, USA.)

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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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Length: 33 pages
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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