Panel cointegration tests of the Fisher effect

Joakim Westerlund
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Joakim Westerlund: Department of Economics, Lund University, Lund, Sweden, Postal: Department of Economics, Lund University, Lund, Sweden

Journal of Applied Econometrics, 2008, vol. 23, issue 2, pages 193-233

Abstract: Most empirical evidence suggests that the Fisher effect, stating that inflation and nominal interest rates should cointegrate with a unit slope on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. For this purpose, we propose two new panel cointegration tests that can be applied under very general conditions, and that are shown by simulation to be more powerful than other existing tests. These tests are applied to a panel of quarterly data covering 20 OECD countries between 1980 and 2004. The evidence suggest that the Fisher effect cannot be rejected once the panel evidence on cointegration has been taken into account. Copyright © 2007 John Wiley & Sons, Ltd.

Date: 2008
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