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Correct Cointegration Tests of the Long Run Relationship Between Nominal Interest and Inflation

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  • Carl Bonham

    (Department of Economics, University of Hawaii at Manoa)

Abstract

The Fisher (1930) hypothesis suggests that a long run equilibrium relationship exists between the nonstationary series: nominal interest and expected inflation. Testing such a cointegrating relationship is complicated by the presence of the unobserved ex ante real rate of interest in residuals from the cointegrating regression. Assumptions concerning the stochastic properties of the expected real rate of interest are examined and two proxies for the ex ante real rate are employed in multivariate cointegration tests of the Fisher hypothesis.
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Suggested Citation

  • Carl Bonham, 1991. "Correct Cointegration Tests of the Long Run Relationship Between Nominal Interest and Inflation," Working Papers 199104, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:199104
    Note: To request a hard copy of this paper, please email the department at econ@hawaii.edu.
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    Cited by:

    1. Månsson, Kristofer & Shukur, Ghazi & Sjölander, Pär, 2012. "Testing for Panel Cointegration in an Error Correction Framework - with an Application to the Fisher Hypothesis," HUI Working Papers 72, HUI Research.
    2. Iris Claus, 1997. "A Measure of Underlying Inflation in the United States," Staff Working Papers 97-20, Bank of Canada.
    3. Westerlund, Joakim, 2005. "Panel Cointegration Tests of the Fisher Hypothesis," Working Papers 2005:10, Lund University, Department of Economics.
    4. Paul Johnson, 2006. "Is it really the Fisher effect?," Applied Economics Letters, Taylor & Francis Journals, vol. 13(4), pages 201-203.
    5. Kate Phylaktis & David Blake, 1993. "The fisher hypothesis: Evidence from three high inflation economies," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 129(3), pages 591-599, September.
    6. Jeung-Lak Lee & Carolyn Clark & Sung Ahn, 1998. "Long- and short-run Fisher effects: new tests and new results," Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 113-124.
    7. Devadoss, Stephen, 1994. "Cointegration Results Of Farm Incomes And Production Costs In U.S. Agriculture," A.E. Research Series 305121, University of Idaho, Department of Agricultural Economics and Rural Sociology.
    8. Takayasu Ito, 2009. "Fisher Hypothesis in Japan: Analysis of Long‐term Interest Rates under Different Monetary Policy Regimes," The World Economy, Wiley Blackwell, vol. 32(7), pages 1019-1035, July.
    9. Kon Lai, 1997. "Is the real interest rate unstable? Some new evidence," Applied Economics, Taylor & Francis Journals, vol. 29(3), pages 359-364.
    10. Junttila, Juha, 2001. "Testing an Augmented Fisher Hypothesis for a Small Open Economy: The Case of Finland," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 577-599, October.
    11. Francesca Di Iorio & Stefano Fachin, 2009. "A residual-based bootstrap test for panel cointegration," Economics Bulletin, AccessEcon, vol. 29(4), pages 3222-3232.
    12. Maghyereh, A. & Al-Zoubi, H., 2006. "Does Fisher Effect Apply in Developing Countries: Evidence From a Nonlinear Cotrending Test applied to Argentina, Brazil, Malysia, Mexico, Korea and Turkey," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(2).
    13. Joakim Westerlund, 2008. "Panel cointegration tests of the Fisher effect," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 193-233.
    14. Kon Lai, 1997. "On the disparate evidence on trend stationarity in inflation rates: a reappraisal," Applied Economics Letters, Taylor & Francis Journals, vol. 4(5), pages 305-309.
    15. Yin-Wong Cheung & Javier Gardeazabal & Jesús Vázquez, 2004. "Exchange Rate Dynamics: Where is the Saddle Path?," CESifo Working Paper Series 1129, CESifo.
    16. Seppo Pynnönen & Warren Hogan & Jonathan Batten, 2002. "Expectations and Liquidity in Yen Bond Markets," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 7(3), pages 335-354.
    17. James Payne & Bradley Ewing, 1997. "Evidence from lesser developed countries on the Fisher hypothesis: a cointegration analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 4(11), pages 683-687.
    18. Chu, Quentin C. & Pittman, Deborah N. & Yu, Linda Q., 2003. "Real rates, nominal rates, and the Fisherian link," International Review of Financial Analysis, Elsevier, vol. 12(2), pages 189-205.

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