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A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators

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E.Panopoulou () (National University of Ireland, Maynooth and University of Piraeus, Greece)

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Abstract

This paper attempts a resolution of the Fisher effect puzzle in terms of estimator choice. Using both short-term and long-term interest rates for 14 OECD countries, we find ample evidence supporting the existence of a long-run Fisher effect in which interest rates move oneto- one with inflation. Our results suggest that the reason why the Fisher effect has not found support internationally lies on the estimation method. When the hypothesis of a unit coefficient relating interest rates to expected inflation is tested within the Autoregressive Distributed Lag (ADL) framework, which is invariant to the integration properties of the data, the Fisher effect easily survives the empirical evidence. Similar, but less robust, results are reached on the grounds of the Pre-Whitened Fully Modified Least Squares (PW-FMLS) or the Johansen’s (JOH) estimators.

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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1500205.

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Length: 28 pages
Date of creation: Feb 2005
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Handle: RePEc:may:mayecw:n1500205

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Postal: Maynooth, Co. Kildare
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Related research
Keywords: Cointegration Estimators; Fisher Effect; ADL; DOLS Small-sample properties;

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Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing

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