Working Papers,
Lund University, Department of Economics

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.

JEL-codes: C12; C15; C32; C33; E40

34 pages, January 26, 2005

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Published as

Joakim Westerlund, (2008), 'Panel Cointegration Tests of the Fisher Hypothesis', Journal of Applied Econometrics, vol 23, pages 193-233

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