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A FUNCTIONAL COEFFICIENT APPROACH TO MODELING THE FISHER HYPOTHESIS: WORLDWIDE EVIDENCE

Published online by Cambridge University Press:  26 February 2010

Helmut Herwartz  and
Hans-Eggert Reimers
Helmut Herwartz*
Affiliation:
Christian-Albrechts-University of Kiel
Hans-Eggert Reimers
Affiliation:
Hochschule Wismar
*
Address correspondence to: Helmut Herwartz, Institute of Statistics and Econometrics, Christian-Albrechts-University of Kiel, Olshausenstr. 40-60, D - 23100 Kiel, Germany; e-mail: [email protected].
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Abstract

We pursue a semiparametric approach to examining core implications of the Fisher hypothesis, namely cointegration linking nominal interest rates and inflation, and homogeneity of the potential equilibrium relation. The sample is an unbalanced panel and comprises monthly time series from more than 100 economies. The time period of at most 45 years is subdivided into three regimes according to dominating monetary policies. To exploit the cross-sectional dimension for inference on parameter homogeneity, we apply mean group estimation of functional coefficients that allow the conditioning of key model parameters on economic states. The evidence in favor of cointegration is weakened over states of negative real interest rates that are likely to coincide with scenarios of high inflation. The ex post real interest rate is mostly diagnosed as unstable. The Fisher hypothesis is particularly confirmed for states characterized by large positive interest rate adjustments during the inflation-targeting regime.

Keywords

Fisher HypothesisPanel DataFunctional Coefficient Models
Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Issue 1 , February 2011 , pp. 93 - 118
Copyright
Copyright © Cambridge University Press 2010

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