A re-evaluation of empirical tests of the Fisher hypothesis

Basma Bekdache and Christopher Baum

No 944, Computing in Economics and Finance 1999 from Society for Computational Economics

Abstract: This paper shows that the recent literature that tests for a long-run Fisher relationship using cointegration analysis is seriously flawed. Cointegration analysis assumes that the variables in question are I(1) or I(d) with the same d. Using monthly post-war U.S. data from 1959-1997, we show that this is not the case for nominal interest rates and inflation. While we cannot reject the hypothesis that nominal interest rates have a unit root, we find that inflation is a long-memory process. A direct test for the equality of the fractional differencing parameter for both series decisively rejects the hypothesis that the series share the same order of integration.

Keywords: Fisher hypothesis; cointegration; long memory (search for similar items in EconPapers)
JEL-codes: C22 C52 E43 E44 (search for similar items in EconPapers)
Pages: 24 pages
Date: 1999-03-01, Revised 2000-09-18
Note: This paper was previously titled "The Fisher Equation in the Context of Fractional Cointegration"
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Citations: View citations in EconPapers (7)

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Working Paper: A re-evaluation of empirical tests of the Fisher hypothesis (2000)
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