Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2005:10:
Panel Cointegration Tests of the Fisher Hypothesis

Joakim Westerlund ()

Abstract: 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.

Keywords: Fisher Hypothesis; Residual-Based Panel Cointegration Test; Monte Carlo Simulation.; (follow links to similar papers)

JEL-Codes: C12; C15; C32; C33; E40; (follow links to similar papers)

34 pages, January 26, 2005

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This paper is published as:
Westerlund, Joakim, (2008), 'Panel Cointegration Tests of the Fisher Hypothesis', Journal of Applied Econometrics, Vol. 23, pages 193-233

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