Panel Non-Stationary Tests of the Fisher Hypothesis in a World Wide Context: An Analysis of 114 Economies during the Period 1960-2004

Abstract

In this paper we follow an empirical approach to examine the implications of the Fisher hypothesis, namely cointegration linking interest rates and inflation, and stationarity of the real interest rate implying in turn homogeneity of the potential equilibrium relation. The considered sample is an unbalanced panel and comprises monthly time series data from more than 100 economies covering at most a period of about 45 years. In total more than 31000 observations enter our empirical analysis. From cross sectional error correction and dynamic OLS regressions we find that the parameters of the dynamic relation depend on economic conditions like the level of inflation or inflation uncertainty. Moreover, our results indicate that from a world wide perspective the (average) Fisher coefficient is less than unity. Applying panel unit root and cointegration tests indicate that interest rates and inflation are cointegrated.

Keywords: Fisher hypothesis, Panel cointegration analysis

JEL Classification: C32, C33, E40