Working Papers, Department of Economics, Lund University
Panel Cointegration Tests of the Fisher Hypothesis
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
- 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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