Co-integration,error correction and the Fisher effect: a clarification |
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Authors: | Philip Garcia Hector O. Zapata |
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Affiliation: | 1. Department of Agricultural Economics , University of Illinois , 427 Mumford Hall, Urbana , Illinois , 61801;2. Department of Agricultural Economics , Louisiana State University , Baton Rouge , Louisiana , 70893 , USA |
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Abstract: | The presence of co-integration between interest rates and inflation implies the existence of an error-correction model and the possibility of two sources of causation. Causality testing which does not account for feedback through the error-correction mechanism as well as through the error-correction mechanism as well as through the lagged changes in the variables can produce misleading reuslts. Reinterpreting Atkin' error-correction model and causality tests in this framework points to a feedback relationship between inflation and post-tax nominal interest rates. These findings are consistent with previously published results but are in contrast to Atkinsapos; conclusion of one-way causality from inflation to interest rates. |
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