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Fisher Hypothesis Revisited: A Fractional Cointegration Analysis

  • Saadet Kirbas Kasman

    ()

    (Department of Economics, Faculty of Business, Dokuz Eylül University)

  • Adnan Kasman

    ()

    (Department of Economics, Faculty of Business, Dokuz Eylül University)

  • Evrim Turgutlu

    ()

    (Department of Economics, Faculty of Business, Dokuz Eylül University)

Registered author(s):

    This paper investigates the validity of the Fisher hypothesis using data from 33 developed and developing countries. Conventional cointegration tests do not provide strong evidence on the relationship between nominal interest rates and inflation. Therefore, we use fractional cointegration analysis to test the long-run relationship between the two variables. The results indicate that the long-run relationship between nominal interest rates and inflation do not exist for most countries in the sample when conventional cointegration test is employed. However, fractional cointegration between the two variables is found for a large majority of countries, implying the validity of the Fisher hypothesis. The results also indicate that the equilibrium errors display long memory.

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    File URL: http://www.deu.edu.tr/UploadedFiles/Birimler/12741/05_04.pdf
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    Paper provided by Dokuz Eylül University, Faculty of Business, Department of Economics in its series Discussion Paper Series with number 05/04.

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    Length: 27 pages
    Date of creation: 23 Nov 2005
    Date of revision: 23 Nov 2005
    Publication status: Forthcoming in Emerging Markets Trade and Finance
    Handle: RePEc:deu:dpaper:0504
    Contact details of provider: Web page: http://www.deu.edu.tr/DEUWeb/Icerik/Icerik.php?KOD=442
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    1. Schwert, G William, 1989. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(2), pages 147-59, April.
    2. Frederic S. Mishkin, 1991. "Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates," NBER Working Papers 3632, National Bureau of Economic Research, Inc.
    3. Sowell, Fallaw, 1992. "Modeling long-run behavior with the fractional ARIMA model," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 277-302, April.
    4. Evans, Martin D D & Lewis, Karen K, 1995. " Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Journal of Finance, American Finance Association, vol. 50(1), pages 225-53, March.
    5. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
    6. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
    7. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    8. Abdol Soofi, 1998. "A fractional cointegration test of purchasing power parity: the case of selected members of OPEC," Applied Financial Economics, Taylor & Francis Journals, vol. 8(6), pages 559-566.
    9. Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-18, February.
    10. Hakan Berument & Mohamed Mehdi Jelassi, 2002. "The Fisher hypothesis: a multi-country analysis," Applied Economics, Taylor & Francis Journals, vol. 34(13), pages 1645-1655.
    11. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June.
    12. Noor Ghazali & Shamshubariah Ramlee, 2003. "A long memory test of the long-run Fisher effect in the G7 countries," Applied Financial Economics, Taylor & Francis Journals, vol. 13(10), pages 763-769.
    13. Lovell, Michael C, 1986. "Tests of the Rational Expectations Hypothesis," American Economic Review, American Economic Association, vol. 76(1), pages 110-24, March.
    14. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    15. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
    16. Valerie Mignon & Sandrine Lardic, 2003. "Fractional cointegration between nominal interest rates and inflation: A re-examination of the Fisher relationship in the G7 countries," Economics Bulletin, AccessEcon, vol. 3(14), pages 1-10.
    17. Cheung, Yin-Wong & Lai, Kon S, 1993. "A Fractional Cointegration Analysis of Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 103-12, January.
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