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The Fisher Effect revisited through an efficient non linear unit root testing procedure

  • Nicolas Million

As the Fisher Effect is either rejected or accepted without a real consensus in empirical studies, it is interesting to test for a unit root in a local-to-unity framework. Moreover, given the inflation expectation behaviour before and after 1979, we shall let a shift occur at a significant time break of our sample, so as to deal with potential non stationarity in the real interest rates series, instead of using Markov switching regimes models. The main innovation is to rely on structural breaks in the deterministic part while combining this method with an efficient unit root test. Empirical results reject a stochastic trend for the US short-term real interest rate from 1951 to 2000. This is consistent with an ex ante real rate constant over time.

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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 10 (2003)
Issue (Month): 15 ()
Pages: 951-954

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Handle: RePEc:taf:apeclt:v:10:y:2003:i:15:p:951-954
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  1. Saikkonen, Pentti & Lütkepohl, Helmut, 1999. "Testing for unit roots in time series with level shifts," SFB 373 Discussion Papers 1999,27, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  3. Garcia, R. & Perron, P., 1994. "An Analysis of the Real Interest rate Under Regime Shifts," Cahiers de recherche 9428, Universite de Montreal, Departement de sciences economiques.
  4. Frederic S. Mishkin, 1981. "The Real Interest Rate: An Empirical Investigation," NBER Working Papers 0622, National Bureau of Economic Research, Inc.
  5. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  6. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Universite de Montreal, Departement de sciences economiques.
  7. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
  8. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  9. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  10. Peter C.B. Phillips, 1998. "Econometric Analysis of Fisher's Equation," Cowles Foundation Discussion Papers 1180, Cowles Foundation for Research in Economics, Yale University.
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