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Fractional cointegration between nominal interest rates and inflation: A re-examination of the Fisher relationship in the G7 countries

Author

Listed:
  • Valerie Mignon

    (University of Paris X - Nanterre - THEMA)

  • Sandrine Lardic

    (University of Paris X - Nanterre - MODEM)

Abstract

According to the Fisher hypothesis, the nominal interest rate is equal to the real interest rate, plus expected inflation. Results concerning the empirical validity of this hypothesis are not unanimous. These contradictions may be due to the fact that the usual concept of cointegration is too restrictive. We thus propose here to refer to the concept of fractional cointegration introduced by Granger (1986). We study the Fisher hypothesis by testing for the existence of a fractional cointegration relationship between nominal interest rates and inflation. Our results suggest that, for a large majority of G7 countries, such a relationship exists.

Suggested Citation

  • Valerie Mignon & Sandrine Lardic, 2003. "Fractional cointegration between nominal interest rates and inflation: A re-examination of the Fisher relationship in the G7 countries," Economics Bulletin, AccessEcon, vol. 3(14), pages 1-10.
    • Handle: RePEc:ebl:ecbull:eb-03c20002
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    Citations

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    Cited by:

    1. Burak Güriş & Yaşar Yaşgül, 2015. "Does the Fisher hypothesis hold for the G7 countries? Evidence from ADL threshold cointegration test," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(6), pages 2549-2557, November.
    2. Guglielmo Maria Caporale & Luis Gil-Alaña, 2019. "Testing the Fisher hypothesis in the G-7 countries using I(d) techniques," International Economics, CEPII research center, issue 159, pages 140-150.
    3. Cecilia Maigua & Gekara Mouni, 2016. "Influence of Interest Rates Determinants on the Performance of Commercial Banks in Kenya," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 121-133, April.
    4. R. Santos Alimi, 2014. "ARDL Bounds Testing Approach to Cointegration: A Re-Examination of Augmented Fisher Hypothesis in an Open Economy," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 2(2), pages 103-114, June.
    5. Ismet Gocer & Serdar Ongan, 2020. "The Relationship between Inflation and Interest Rates in the UK: The Nonlinear ARDL Approach," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(3), pages 77-86.
    6. Marilena Furno, 2021. "Cointegration tests at the quantiles," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1087-1100, January.
    7. Caporale, Guglielmo Maria & Carcel, Hector & Gil-Alana, Luis, 2017. "Central bank policy rates: Are they cointegrated?," International Economics, Elsevier, vol. 152(C), pages 116-123.
    8. Muse, Bernard & Alimi, R. Santos, 2012. "Testing an Augmented Fisher Hypothesis for a Small Open Economy: The Case of Nigeria," MPRA Paper 44987, University Library of Munich, Germany.
    9. Awomuse, Bernard O. & Alimi, Santos R., 2012. "The Relationship between Nominal Interest Rates and Inflation: New Evidence and Implication for Nigeria," MPRA Paper 49684, University Library of Munich, Germany.
    10. Giorgio Canarella & Luis A. Gil-Alana & Rangan Gupta & Stephen M. Miller, 2020. "The Behavior of Real Interest Rates: New Evidence from a ``Suprasecular" Perspective," Working Papers 202093, University of Pretoria, Department of Economics.
    11. Saadet Kirbas Kasman & Adnan Kasman & Evrim Turgutlu, 2005. "Fisher Hypothesis Revisited: A Fractional Cointegration Analysis," Discussion Paper Series 05/04, Dokuz Eylül University, Faculty of Business, Department of Economics, revised 23 Nov 2005.
    12. Giorgio Canarella & Luis A. Gil‐Alana & Rangan Gupta & Stephen M. Miller, 2022. "The behaviour of real interest rates: New evidence from a 'suprasecular' perspective," International Finance, Wiley Blackwell, vol. 25(1), pages 46-64, April.
    13. Rahman, Abdurrahman Arum, 2020. "Organic global cryptocurrency:towards a stable international monetary system that is closer to Maqasid Sharıʿah," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 28, pages 63-82.
    14. Meyer Danie Francois & Chipeta Chama & Camel Richard Thabang Mc, 2018. "An Analysis of the Effectiveness of Interest Rates to Facilitate Price Stability and Economic Growth in South Africa," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 63(3), pages 68-90, December.
    15. Borja Balparda & Guglielmo Maria Caporale & Luis Alberiko Gil-Alana, 2017. "The fisher relationship in Nigeria," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(2), pages 343-353, April.
    16. Burcu Kiran, 2013. "A fractional cointegration analysis of Fisher hypothesis: evidence from Turkey," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(2), pages 1077-1084, February.

    More about this item

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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