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

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  • Nicolas Million

Abstract

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.

Suggested Citation

  • Nicolas Million, 2003. "The Fisher Effect revisited through an efficient non linear unit root testing procedure," Applied Economics Letters, Taylor & Francis Journals, vol. 10(15), pages 951-954.
  • Handle: RePEc:taf:apeclt:v:10:y:2003:i:15:p:951-954
    DOI: 10.1080/1350485032000164053
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    References listed on IDEAS

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    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    2. Garcia, Rene & Perron, Pierre, 1996. "An Analysis of the Real Interest Rate under Regime Shifts," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 111-125, February.
    3. 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.
    4. Mishkin, Frederic S., 1981. "The real interest rate: An empirical investigation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 151-200, January.
    5. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    6. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July.
    7. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    8. 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.
    9. Peter C.B. Phillips, 1998. "Econometric Analysis of Fisher's Equation," Cowles Foundation Discussion Papers 1180, Cowles Foundation for Research in Economics, Yale University.
    10. 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 461-470, October.
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    Cited by:

    1. Georgios P. Kouretas & Mark E. Wohar, 2012. "The dynamics of inflation: a study of a large number of countries," Applied Economics, Taylor & Francis Journals, vol. 44(16), pages 2001-2026, June.
    2. Narayan, Paresh Kumar & Popp, Stephan, 2011. "An application of a new seasonal unit root test to inflation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 707-716, October.
    3. Million, Nicolas, 2004. "Central Bank's interventions and the Fisher hypothesis: a threshold cointegration investigation," Economic Modelling, Elsevier, vol. 21(6), pages 1051-1064, December.
    4. repec:hal:journl:halshs-00119051 is not listed on IDEAS
    5. Holmes, Mark J. & Dutu, Richard & Cui, Xiaoman, 2009. "Real interest rates, inflation and the open economy: A regime-switching perspective on Australia and New Zealand," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 351-360, March.

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