Department of Economics and Business Economics

Changes in persistence, spurious regressions and the Fisher hypothesis

Research output: Working paperResearch

Documents

  • Rp13 11

    Submitted manuscript, 406 KB, PDF document

  • Robinson Kruse
  • Daniel Ventosa-Santaulària, Centro de Investigación y Docencia Económicas, CIDE, Mexico
  • Antonio E. Noriega, Banco de Mexico, Mexico
Declining inflation persistence has been documented in numerous studies. When such series are analyzed in a regression framework in conjunction with other persistent time series, spurious regressions are likely to occur. We propose to use the coefficient of determination R2 as a test statistic to distinguish between spurious and genuine regressions in situations where time series possibly (but not necessarily) exhibit changes in persistence. To this end, we establish some limit theory for the R2 statistic and conduct a Monte Carlo study where we investigate its finite-sample properties. Finally, we apply the test to the Fisher equation for the U.S. and Mexico. Contrary to a rejection using cointegration techniques, the R2-based test offers strong evidence favourable to the Fisher hypothesis.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages22
Publication statusPublished - 18 Apr 2013
SeriesCREATES Research Papers
Number2013-11

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