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Estimator Choice and Fisher's Paradox: A Monte Carlo Study

Listed author(s):
  • Guglielmo Maria Caporale
  • Nikitas Pittis

This paper argues that Fisher's paradox can be explained away in terms of estimator choice. We analyse by means of Monte Carlo experiments the small sample properties of a large set of estimators (including virtually all available single-equation estimators), and compute the critical values based on the empirical distributions of the t-statistics, for a variety of Data Generation Processes (DGPs), allowing for structural breaks, ARCH effects etc. We show that precisely the estimators most commonly used in the literature, namely OLS, Dynamic OLS (DOLS) and non-prewhitened FMLS, have the worst performance in small samples, and produce rejections of the Fisher hypothesis. If one employs the estimators with the most desirable properties (i.e., the smallest downward bias and the minimum shift in the distribution of the associated t-statistics), or if one uses the empirical critical values, the evidence based on US data is strongly supportive of the Fisher relation, consistently with many theoretical models.

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Article provided by Taylor & Francis Journals in its journal Econometric Reviews.

Volume (Year): 23 (2004)
Issue (Month): 1 ()
Pages: 25-52

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Handle: RePEc:taf:emetrv:v:23:y:2004:i:1:p:25-52
DOI: 10.1081/ETC-120028835
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