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Panel Cointegration Tests of the Fisher Hypothesis

Recent empirical studies suggest that the Fisher hypothesis, stating that inflation and nominal interest rates should cointegrate with a unit parameter on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be explained in part by the low power inherent in univariate cointegration tests and that the use of panel data should generate more powerful tests. In doing so, we propose two new panel cointegration tests, which are shown by simulation to be more powerful than other existing tests. Applying these tests to a panel of monthly data covering the period 1980:1 to 1999:12 on 14 OECD countries, we find evidence supportive of the Fisher hypothesis.

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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2005:10.

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Length: 34 pages
Date of creation: 26 Jan 2005
Date of revision:
Publication status: Published as Westerlund, Joakim, 'Panel Cointegration Tests of the Fisher Hypothesis' in Journal of Applied Econometrics, 2008, pages 193-233.
Handle: RePEc:hhs:lunewp:2005_010
Contact details of provider: Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en

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  8. Peter C.B. Phillips, 1985. "Understanding Spurious Regressions in Econometrics," Cowles Foundation Discussion Papers 757, Cowles Foundation for Research in Economics, Yale University.
  9. Robert King & Mark W. Watson, 1992. "Testing Long Run Neutrality," NBER Working Papers 4156, National Bureau of Economic Research, Inc.
  10. Koustas, Zisimos & Serletis, Apostolos, 1999. "On the Fisher effect," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 105-130, August.
  11. Peter C.B. Phillips, 1986. "Weak Convergence to the Matrix Stochastic Integral BdB," Cowles Foundation Discussion Papers 796, Cowles Foundation for Research in Economics, Yale University.
  12. Park, Joon Y. & Phillips, Peter C.B., 1989. "Statistical Inference in Regressions with Integrated Processes: Part 2," Econometric Theory, Cambridge University Press, vol. 5(01), pages 95-131, April.
  13. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  14. Mishkin, Frederic S., 1992. "Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 195-215, November.
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  17. 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.
  18. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  19. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
  20. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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  22. Guglielmo Maria Caporale & Nikitas Pittis, 2004. "Estimator Choice and Fisher's Paradox: A Monte Carlo Study," Econometric Reviews, Taylor & Francis Journals, vol. 23(1), pages 25-52.
  23. Choi, In, 1992. "Durbin-Hausman Tests for a Unit Root," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 289-304, August.
  24. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  25. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  26. Li, Hongyi & Maddala, G. S., 1997. "Bootstrapping cointegrating regressions," Journal of Econometrics, Elsevier, vol. 80(2), pages 297-318, October.
  27. Choi, In, 1994. "Durbin-Hausman tests for cointegration," Journal of Economic Dynamics and Control, Elsevier, vol. 18(2), pages 467-480, March.
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