Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

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

Joakim Westerlund ()
Additional contact information
Joakim Westerlund: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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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