New Empirical Evidence for the Fisher Relation: Integration and Short-Run Instability

Seoul Journal of Economics 28 (No. 4 2015): 487-497

12 Pages Posted: 1 Dec 2015

See all articles by Jae-Young Kim

Jae-Young Kim

Seoul National University - Department of Economics

Woong Yong Park

Seoul National University

Date Written: November 30, 2015

Abstract

The Fisher relation is a key theoretical relation that underlies many important results in economics and finance. Although the Fisher relation is apparently simple in theory, empirical analyses of the relation have mixed and weak results. We consider the possibility that weakness of the evidence is due to short-run instability in the relation, which is sufficiently strong to dominate the whole sample. We analyze this possibility based on the following two approaches. First, we apply partial-sample instability tests of Andrews and Kim (2006) to detect such short-run instability. Our result shows clear evidence for the existence of such short-run instability. Second, we examine how much the partial-sample instability affects the long-memory property of the real interest rate based on the concept of fractional integration. Our result indicates that the short-run instability causes a substantial increase in the coefficient of fractional integration, which implies an increase in the tendency of nonstationarity.

Keywords: Fisher relation, Short-run instability, Fractional integration

JEL Classification: C1, C22, C5

Suggested Citation

Kim, Jae-Young and Park, Woong Yong, New Empirical Evidence for the Fisher Relation: Integration and Short-Run Instability (November 30, 2015). Seoul Journal of Economics 28 (No. 4 2015): 487-497, Available at SSRN: https://ssrn.com/abstract=2697326

Jae-Young Kim (Contact Author)

Seoul National University - Department of Economics ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742
Korea

Woong Yong Park

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

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