A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators


28 Pages Posted: 1 Apr 2005

Date Written: February 2005


This paper attempts a resolution of the Fisher effect puzzle in terms of estimator choice. Using both short-term and long-term interest rates for 14 OECD countries, we find ample evidence supporting the existence of a long-run Fisher effect in which interest rates move one to-one with inflation. Our results suggest that the reason why the Fisher effect has not found support internationally lies on the estimation method. When the hypothesis of a unit coefficient relating interest rates to expected inflation is tested within the Autoregressive Distributed Lag(ADL) framework, which is invariant to the integration properties of the data, the Fisher effect easily survives the empirical evidence. Similar, but less robust, results are reached on the grounds of the Pre-Whitened Fully Modified Least Squares (PW-FMLS) or the Johansen's (JOH) estimators.

Keywords: Cointegration Estimators, Fisher Effect, ADL, DOLS, Small-sample properties

JEL Classification: E40, E50, C12, C13

Suggested Citation

Panopoulou, Ekaterini, A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators (February 2005). N150/02/05, Available at SSRN: https://ssrn.com/abstract=680401 or http://dx.doi.org/10.2139/ssrn.680401

Ekaterini Panopoulou (Contact Author)

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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