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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 28, No. 4, pp.487-497
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2015
Received 19 Oct 2015 Revised 11 Nov 2015 Accepted 19 Nov 2015

New Empirical Evidence for the Fisher Relation: Integration and Short-run Instability

Jae-Young Kim ; Woong-Yong Park
Corresponding author, Professor, School of Economics, Seoul National University, San 56-1 Shilim-dong Kwanak-gu Seoul, 151-742, Korea, Tel: 82-2-880-6390, Fax: 82-2-886-4231 jykim017@snu.ac.kr
Professor, Department of Economics, University of Illinois at Urbana Champaign, IL, USA, Tel: 1-217-244-9643, Fax: 1-217-244-6678 wypark@illinois.edu

JEL Classification: C1, C22, C5

Abstract

The Fisher relation is a key theoretical relation that underlies many important results in economics and finance. Alhough the Fisher relation is apparently simple in theory, empirical analyses of the relation have mixed and weak results. We consider the possibility that weakness of the evidence is due to short-run instability in the relation, which is sufficiently strong to dominate the whole sample. We analyze this possibility based on the following two approaches. First, we apply partial-sample instability tests of Andrews and Kim (2006) to detect such short-run instability. Our result shows clear evidence for the existence of such short-run instability. Second, we examine how much the partial-sample instability affects the long-memory property of the real interest rate based on the concept of fractional integration. Our result indicates that the short-run instability causes a substantial increase in the coefficient of fractional integration, which implies an increase in the tendency of nonstationarity.

Keywords:

Fisher relation, Short-run instability, Fractional integration

Acknowledgments

This work was supported by the National Research Foundation Grant funded by the Korean Government. NRF-2010-413-B00006 and by Institute for Economic Research in Seoul National University.

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