Abstract
This study provides evidence supportive of Fisher hypothesis in East Asian economies using panel unit root tests, which allow for the consideration of cross-country interdependence of real interest rates in the estimation. One important implication of our finding is that monetary policy will be more effective in influencing long-term interest rates and long-run macroeconomic stability in these East Asian economies with regional collaboration.
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Notes
One exception is the recent work of Granville and Mallick (2004) who is able to provide evidence supportive of Fisher hypothesis by employing a century data covering from 1900 to 2000. In contrast, Rose (1988) is unable to find result in favor of the hypothesis using shorter span of data from 1892 to 1970 for the US.
Im et al. (1997) demonstrated a substantial increase in power in panel unit root test, which allows for cross-sectional variation, even for fairly short time series.
Unlike another panel unit root test advocated by Levin et al. (2002) who imposed the restrictive assumption of homogeneity, Im et al. (2003) allow for heterogenity across groups and serial correlation errors across groups. Therefore, it achieves more accurate size and higher power relative to the Levin et al. (2002) test. By using a Monte Carlo simulation, Im et al. (2003) showed better finite sample performances of ψ t in relation to the Levin et al. (2002) test.
The work of Levin and Lin (1993) is published as Levin et al. (2002).
Choi (2001) demonstrates the use of ADF-GLS test in his proposed Fisher test. By applying the Fisher test in the study of purchasing power parity (PPP), he demonstrated the proposed test is more powerful than ADF–GLS and t-bar test of Im et al. (2003).
This finding may reflect the fact that these three countries share quite similar monetary policies in the sense that they had the experience of fixing their respective currencies against US dollar for the past few decades, as well as same goals to maintain low inflation and a stable exchange rate (see Bank for International Settlements, 2006). However, it is too early to base our conclusion on the finding of ADF test, in which the shortcomings of this test had been discussed earlier.
Analysis of the longer sample has been included at the suggestion of one of the reviewers.
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Acknowledgements
The authors sincerely thank the two anonymous referees and the Editor, Paul Wachtel, for their insightful comments on the earlier version of this study. The authors are solely responsible for remaining errors.
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Ling, TH., Liew, VS. & Syed Khalid Wafa, S. Does Fisher Hypothesis Hold for the East Asian Economies? An Application of Panel Unit Root Tests. Comp Econ Stud 52, 273–285 (2010). https://doi.org/10.1057/ces.2010.4
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DOI: https://doi.org/10.1057/ces.2010.4