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Changes in persistence, spurious regressions and the Fisher hypothesis

Listed author(s):
  • Kruse Robinson

    ()

    (CREATES, Aarhus University, Department of Economics and Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark)

  • Ventosa-Santaulària Daniel

    (Centro de Investigación y Docencia Económicas, CIDE , Carretera México-Toluca 3655, Col. Lomas de Sta Fe, Del. Álvaro Obregón, México D.F, C.P. 01210, México)

  • Noriega Antonio E.

    (Banco de México, Dirección General de Emisión, Legaria 691, Col. irrigación, México D.F., México)

Declining inflation persistence has been documented in numerous studies. We show that when time series with changes in persistence are analyzed in a regression framework with other persistent time series like interest rates, spurious regressions are likely to occur. We propose the coefficient of determination R2 as a simple test statistic to distinguish between spurious and genuine regressions in situations where time series possibly exhibit changes in persistence. We extend the analysis towards fractional (co-)integration as well. To this end, we establish the limit theory for the R2 statistic and conduct a Monte Carlo study where we investigate its finite-sample properties. The test performs remarkably well in terms of size and power and is robust to level shifts and multiple changes in persistence. Finally, we apply the test to the Fisher equation for the United States. The newly proposed R2-based test offers robust evidence favourable to the Fisher hypothesis.

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Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 21 (2017)
Issue (Month): 3 (June)
Pages: 1-28

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Handle: RePEc:bpj:sndecm:v:21:y:2017:i:3:p:28:n:1
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