A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators
N150/02/05
28 Pages Posted: 1 Apr 2005
Date Written: February 2005
Abstract
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: Suggested Citation
Here is the Coronavirus
related research on SSRN
Paper statistics
Recommended Papers
-
A Simple Mle of Cointegrating Vectors in Higher Order Integrated Systems
By James H. Stock and Mark W. Watson
-
Stochastic Trends and Economic Fluctuations
By Robert G. King, Charles I. Plosser, ...
-
On the Estimation and Inference of a Cointegrated Regression in Panel Data
By Chihwa Kao and Min-hsien Chiang
-
Interpreting Evidence on Money-Income Causality
By James H. Stock and Mark W. Watson
-
Long-Run Income and Interest Elasticities of Money Demand in the United States
By Dennis L. Hoffman and Robert Rasche
-
Do Equilibrium Real Business Cycle Theories Explain Post-War U.S. Business Cycles?
-
Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data
By Robert Litterman and Laurence Weiss
-
A Reappraisal of Recent Tests of the Permanent Income Hypothesis
