Revisiting the Fisher Hypothesis for Several Selected Developing Economies: a Quantile Cointegration Approach

C C Tsong and A Hachicha

Economic Issues Journal Articles, 2014, vol. 19, issue 1, 57-72

Abstract: This paper reinvestigates the validity of the Fisher hypothesis, for several selected developing countries. With the quantile cointegration method proposed by Xiao (2009), we find that the long-run coefficients between nominal interest rates and inflation can be affected by the shocks and, therefore, may vary over time. More specifically, in the upper quantiles there is one-to-one relationship between the two variables, supporting the Fisher effect, while in the lower quantiles, the nominal interest rate responds by a lower percentage than the change in inflation. This is known as the Fisher effect puzzle. Thus the Engle-Granger cointegration regression may suffer from model misspecification, because of the assumption of a constant cointegrating vector. A possible explanation for such an asymmetric relationship between the two variables is provided.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eis:articl:114tsong

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