A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators.
Panopoulou, Ekaterini (2004) A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators. .
This paper attempts a resolutin 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 founf support internatinally lies on the estimation method. When the hypothesis of a unit coefficient relating interest rates to expected inflation is tested with the Autoregressive Distributed Lag (ADL) framework. Which is invariant to the integration properties of the data,the Fishereffect easily survives the empirical evidence. Similar, but less robust, results are reached on the grounds of the Pre-Whitened Fully Modified Leas Squares (PW-FMLS) or the Johansen's (JOH) estimators.
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