Panel Cointegration Tests of the Fisher Hypothesis

Joakim Westerlund

No 2005:10, Working Papers from 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. (search for similar items in EconPapers)
JEL-codes: C12 C15 C32 C33 E40 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2005-01-26
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Westerlund, Joakim, 'Panel Cointegration Tests of the Fisher Hypothesis' in Journal of Applied Econometrics, 2008, pages 193-233.

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:lunewp:2005_010

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