 A panel analysis of the fisher effect with an unobserved I(1) world real interest rateEconomic Modelling, 2014, vol. 41, issue C, 198-210 Abstract: The Fisher effect states that inflation expectations should be reflected in nominal interest rates in a one-for-one manner to compensate for changes in the purchasing power of money. Despite its wide acceptance in theory, much of the empirical work fails to find favorable evidence. This paper examines the Fisher effect in a panel of 21 OECD countries over the period 1983–2010. Using the Panel Analysis of Non-stationarity in Idiosyncratic and Common Components (PANIC), a non-stationary common factor is detected in the real interest rate. This may reflect permanent common shifts in e.g. time preferences, risk aversion and the steady-state growth rate of technological change. We therefore control for an unobserved non-stationary common factor in estimating the Fisher equation using both the Common Correlated Effects Pooled (CCEP) and the Continuously Updated (Cup) estimation approach. The impact of inflation on the nominal interest rate is found to be insignificantly different from 1, providing support of the Fisher effect. Keywords: Fisher effect; Panel cointegration; Cross-sectional dependence; Unobserved common factors (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:41:y:2014:i:c:p:198-210 DOI: 10.1016/j.econmod.2014.05.005 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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