Assignment Fisher 1

Testing the
Existence and
Forecasting the
Fisher Effect in
Malaysia and
Canada
BSc Banking and
Finance
073604149
073604149
Testing the Existence and Forecasting the Fisher Effect in Malaysia
and Canada
1.0 Introduction
For my project, I wish to test, forecast and compare to see if

there is a fisher effect in both Canada and Malaysia between the
years of 1995 to 2009 with quarterly seasonally adjusted data which
I think will give me a good span of data to build a model and so I
can have a good comparison of the two countries. It is not as much
as I wanted, but I think it is enough for this project. My project is
structured as follows;
Section 2.0 is the economic and econometrics background
theory of the fisher effect.
Section 3.0 I will talk about previous published papers on the
fisher effect and its existence.
In section 4.0 I will explain my data, my variables and how I
got them and what I did to them.
Section 5.0 will be all my results from the tests I used from
econometric models and graphs.
Section 6.0 I will then finally evaluate my results and then
compare my results in the conclusion.
The reason I choose the two countries, that I thought I might
get results that differ due to continental reasons, which may affect
the factors that affect the fisher effect, and also I think that Malaysia
is not such a well developed country in terms of its economy as
2
073604149
and Canada
Canada is.
2.0 Economics Theory
The fisher effect was introduced in 1930, and it shows the

relationship between interest rates and inflation, and it shows that
the nominal interest rate at a given time is equal to the sum of the
real interest and the expected rate of inflation. There are three
variables in the fisher equation, they are nominal inflation rate
which is denoted by ‘p’, which is the change in price level, the
nominal interest rate ’i’ which is the actual interest rate without any
adjustments in the economy and the real interest rates ‘r’ which is
the interest rate that has been adjusted to remove the effects of
inflation. This relationship can be denoted by:
r=i- π
The purchasing power can be found by finding the difference

between the nominal interest rate and the rate of inflation, and the
above can be rearranged to give:
i=r+ π
the more accurate fisher effect equation is written as:
it=rt+ π et
where π et is the expected inflation rate. Once the nominal interest

rate has been set, the inflation rate is known, therefore only adjust
to the expected inflation.
There are two types of Real interest rates, ex ante and ex post. Ex
ante is when for example the interest rate that the borrower and the
lender expect to receive when the take out a loan, the actual real
interest rate realised is the ex post real interest rate.
3
073604149
and Canada
The fisher effect hypothesis says that the efficient capital

markets compensate for changes in the purchasing power of money
in the long run will not have an effect on a countries relative prices.
For example, if the rate of expected inflation increased by 2%, this
should change the nominal interest rate and increase that by 2%.
This movement together of the expected inflation and nominal
interest rate is what the fisher effect is.
2.1 Econometric Theory
The nominal interest rate can be divided into two parts, the ex
ante real interest rate ret, and the expected inflation π et. This was
proposed by Fisher (1930). Using this, the fisher effect can be
written as it= ret + πte . It is possible that the expected inflation may
be different from actual inflation. The errors are said to be
stationary, both types of interest rates have similar properties when
they differ by a stationary factor, therefore:
it= πte+rt+e where rt=it- πte
Changes in expected rate of inflation are shown by nominal interest

rate which can be shown by It= πte
This means that it+(it- πte)+( πte- πt)= πt+et, where E(et)=0 and
is stationary.
The international fisher effect says that the difference in two
countries interest rate should be equal to the difference in its
expected inflation. This means that if a country has a high nominal
interest rate then it will have a high expected inflation.
3.0 Literature review
4
073604149
and Canada
In the paper ‘Is there really the Fisher effect’ written by Paul
A. Johnson, Johnson writes about how the cointegration of the
inflation and nominal interest rates is constant with any theory
implying a stationary interest rate and therefore is not a sufficient
condition for the fisher effect to hold.
Mishkin also wrote a paper ‘Is the Fisher effect for real’ where
he found support for the long-run fisher relationship where inflation
and interest rates are cointegrated. In his later paper he found that
both interest rate and inflation contained unit roots and the rest
indicated that there was evidence of long run fisher effect but none
for short run fisher effect. His paper solves the problem of why
strong fisher effect occurs only in some periods and not others by
re-examining the relationship between inflation and interest rates
with modern techniques. Mishkin was one of the first to use the
Engle-Granger concept of Cointegration successfully.
In another paper, ‘the fisher effect: new evidence and

implications’ written by Fahmy and M.Kandil, the results that they
achieved did not support the short run fisher effect because short-
term interest rates are associated with small changes in expected
inflation. The results also did not favour the long run fisher effect
and the correlation between nominal interest rates and inflation
rates until they move together in relation. They use the Johansen
test for cointegration.
Perez, S.J and M.V Siegler (2003) performed similar studies

where they explore the field of potential non linearity’s data sets.
A paper published by Arusha Cooray ‘THE FISHER EFFECT: A

REVIEW OF THE LITERATURE’ showed that by using the Johansen
5
073604149
and Canada
cointegration approach, there was a presence of a relationship

between nominal interest rates and inflation for some developing
countries, which were Malaysia, Sri Lanka and Pakistan, while no
evdidence of the fisher effect for other developing countries like Fiji,
India and Thailand.
4.0 Description of my data.
Below is a list of my data that I have used, and the

abbreviated name for that variable that has been used in eviews.
The abbreviation is in italics.
Cpi_mly: CPI Malaysia

Nominal_mly: nominal interest rate of Malaysia
Logcpi_mly: log CPI Malaysia (inflation rate Malaysia)
Lognominal_mly: log nominal Malaysia
dlogcpi_mly: first differential inflation Malaysia
dlognominal_mly: first differential nominal interest rate Malaysia
resid_mly: Residual Malaysia
Cpi_can: CPI Canada

Nominal_can: nominal interest rate of Canada
Logcpi_can: log CPI Canada (inflation rate Canada)
Lognominal_can: log nominal Canada
dlogcpi_can: first differential inflation Canada
dlognominal_can: first differential nominal interest rate Canada
resid_can: Residual Canada
I collected my data from two different sources; I got data from

the ESDS website and from the Bank of Canada website. I have
6
073604149
and Canada
quarterly data from 1999 to 2009, which is not as much as I would

have liked but I still think the number of observations I have will
give enough evidence to see if there is an existence of the fisher
effect in Canada and Malaysia. It was difficult to get data for a
longer time because there was data missing and the earliest data I
did find was starting from 1999. To get the inflation rate of the two
countries I had to get the CPI data then log it to get the inflation
rate.
5.0 Analysis
First I will show a comparison of my regular data and my

logged data, then I will do a test for normality using histograms,
then I will test my data for stationarity, to do this I will have to use
the augmented dickey fuller test to test the presence of a unit root.
The Dickey fuller test is one of the most used tests, it tests whether
a unit root is present in an autoregressive model. Then I will test
my variables for cointegration using engle granger test, I will test for
heteroskedasticity, then with this I will run the regression of the
model and test for stationarity of my residuals. Then I will compare
my results of the two countries. I will perform a unit root test to test
if a time series variable is stationary or non stationary using an
autoregressive model. I will also do a forecasting test, by using the
Chow forecast test.
5.1 Comparison of original data and transformed data.
In the appendix the plotted variables are against their logged

values. The reason for logging the values is to convert the data into
a smaller range which makes the data to work with and to create a
model with. The graphs show what I expected, showing a smaller
version of the normal variable for the respected variables. The
7
073604149
and Canada
graphs show that there isn’t a structural break, and it follows a

trend, this is good for the tests that I want to implement.
5.2 Histograms, Test for normality.
There are many tests that you could do to check if the data is
normally distributed, one test is to plot your data into a histogram
and to see if is normally distributed with this graphical method. The
results are summerised in the table below and the histograms are in
the appendix.
Skewnes Kurtosi Probabilit
s s Jarque-Bera y
-
2.36640 9.1556
Log Cpi Canada 4 52 150.7288 0.000000
-
2.80282 12.976
Dlog Cpi Canada 8 33 321.9201 0.000000
-
Log Cpi 0.02855 2.2371
Malaysia 7 3 1.438698 0.487069
Dlog Cpi 1.35061 9.7526
Malaysia 8 28 127.8287 0.000000
Log nominal 0.04142 1.6208
Canada 2 1 4.772571 0.091971
-
Dlog nominal 0.47913 3.3482
Canada 3 32 2.555537 0.278658
Log nominal 2.1788
Malaysia 0.66748 07 6.038844 0.048829
-
Dlog nominal 1.25569 10.050
Malaysia 7 03 135.3577 0.000000
As you can see my histograms in the appendix for all of my log
8
073604149
and Canada
variables they are not normally distributed, therefore the variables

are not normal. But when I differenced the log of the variables,
there is a slightly more consistency, but it is not normally
distributed, just there is a bit more of a left skweness. Dlogcpi
Canada is left skewed, I did this by eye by looking at the histogram
itself, but as you can see on the right of every histogram is a table
of numbers, and at the skewness there is a number, for it to be
normally distributed, the number should be zero, the number should
be as close to zero as possible for it to be normally distributed. The
range at which the skewness is is from -1 which is left skewed to 1
which is right skewed. Also if you look at the Kurtosis, this number
should ranged between -2 and 2, if it is between this it is normally
distributed, and again as you can see most of the data is outside
this range. So as you can see my data has a non-normal
distribution. Also if you look at the Jarque-Bera statistic and the
corresponding probability, if that probability is less than 0.05 then
again the data is not normal.
5.3 Stationary properties of variables
To test whether my data for stationarity, I used the ADF test

at both level and first difference to test for a unit root of all my
logged variables and I achieved the following results:
1st
Level Differenc
Variable DF Used (H0) e (H1)
t- Critical Critical
statistic value t-statistic value
- -
Trend and 3.49529 3.49529
lognominal_mly intercept -1.97244 5 -3.66315 5
lognominal_can Trend and -2.73596 - -5.25478 -
intercept 3.48922 3.49369
9
073604149
and Canada
8 2
- -
Trend and 3.49066 3.49214
logcpi_mly intercept -2.61554 2 -5.85026 9
- -
Trend and 3.48922 3.48922
logcpi_can intercept -1.75387 8 -4.34684 8
And as you can see in 1st difference the t-statistic is smaller than the
critical value of 5% which shows that the data is stationary.
Stationary is when the statistical properties of a time series’ data,
such as mean and variance, are all constant over time. We are
given an idea for finding appropriate forecasting models whilst
making data stationary. Having stationary data makes extrapolation
more valid when using statistical findings. I could have also used the
Phillips Perron test, which would have done the same thing.
5.4 Autocorrelation function of the variables.
The autocorrelation function (ACF) of a variable expresses the

correlation between the two variables at different points in time and
this is displayed graphically in the appendix. When the
autocorrelation function moves in a steady pattern it means that the
variables are non stationary.
In the appendix are the auto correlation and partial correlation
function of the inflation and interest rates for both Canada and
Malaysia. There are two sets of graphs per variable of log and dlog,
which is the level and 1st difference part, and this is done because at
level the variables my not be stationary, so doing it at 1st difference
makes the variables stationary. The reason for using difference log
on my logged variables is because for my logged variables there is
negative inflation values, so I had to difference them.
10
073604149
and Canada
5.5 Cointegration
Cointegration is and econometric property for time series

variables. It is a way of testing the hypothesis of the relationship
between variables that have a unit root. This is used to help
describe the movement of data that is measured over a period of
time. If two or more series are individually integrated but some
linear combinations of them have a lower order of integration then
the series are said to be cointegrated.
Engle and Granger introduced the notion of Cointegration.
They showed that a linear combination of integrated variables can
possibly be stationary. This process tries to determine whether or
not the residuals of the equilibrium relationship are stationary.
Engle and Granger (1997) found that if Cointegration exists between
two variables in the long-run, then there must exist either
unidirectional or bi-directional Granger causality between the two
variables. They also found that the cointegrated variables must
have an error correction model representation.
What I expect to find is that there is a relationship between
the inflation and nominal interest rates for Canada. However not
such an obvious relationship in Malaysia. To test for the existence of
Cointegration, I have to use Engel Granger. I have to run a
regression and test it for unit root using ADF test. If at level it is
stationary and at 1st difference it is stationary, then I will have to run
an error correction model. But before this I will first run my
regression, then I will check for heteroskedasticity, using the white
test, it basically means that a series of random variances that are
different, there is also series of data which have the same variances
which is called homoskedasticity. And the white test tests to see
whether the variance of residuals is constant. My results are
summerised below and the full output is in my appendix:
White test
11
073604149
and Canada
Obs*R-
squared Prob Chi2 value
Canad 0.000 11.07049
a 21.2838 0 769
Malays 0.000 11.07049
ia 8.064592 0 769
So if the R2 value is less than or equal to the Chi squared then you
can not reject the null hypothesis, therefore it is heteroskedasticity.
Now I will do the engel granger method for Cointegration. The

output for my regression for Canada gives the regression:
πt=22.67175-4.678007it+et
The output for my regression for Malaysia gives:
πt=4.775677-0.181368it+et
The two regression tables shown in the appendix shows the

regressions of linear relationships between interest rates and
inflation. Also if you look at the prob (F-statistic) value on the two
regressions, the regression for Canada and the regression for
Malaysia are 0.000001 and 0.000000 respectively. The two
regression outputs show the regressions of linear relationships
between interest rates and inflation.
The coefficients are estimated by OLS and to check if there
are any unit roots present in the residuals I will test my them for
unit roots, with the Augmented dickey fuller test, my results are
summerised as followed and the tables are output is in the
appendix:
1st
Differenc
Residual Level e
t- Critical Critical
statistic value t-statistic value
Residual - - - -
12
073604149
and Canada
1.96941 3.48922 3.49066

Canada 0 8 4.350184 2
- - -
Residual 2.16631 3.49066 - 3.49066
Malaysia 2 2 6.192455 2
So as you can see, for my critical value which is 5% is larger than
the t-statistic figure, therefore the unit root test confirms that the
residuals are stationary at 1st difference, and are non stationary at
level, therefore my variables are not cointegrated, so there is no
need to do an error correction model. If I was to do an error
correction model, then I would use two step engel granger
procedures, to correct my model then I would have to redo the ADF
test again and then the amended residuals would be stationary at
1st difference.
5.6 Chow Forecasting
The Chow test was invented by economist Gregory Chow. In

econometrics, the Chow test is most commonly used in time series
analysis. The chow forecast test estimates the model for a
subsample. The estimated model is then used to predict the values
of the dependent variable. A large difference between the actual
and predicted values casts doubt on the stability of the estimated
relation over the two subsamples. The Chow forecast test can be
used with least squares and two-stage least squares regressions.
My chow forecasting output is summerised below:
F- F-
statisti statistics(Ch Prob.
c ow) F
Canad 39.217 12.85481 0.00
a from 99 00
13
073604149
and Canada
2005
Q1
Malays 87.970
ia from 09
2005Q 0.00
1 9.423081 00
So if you look at the ‘prob f’ number, for both the output for the
chow test says its 0.0000 for both regression then this means that
there is a high margin of error, so in other words the regression will
be very inaccurate in forecasting future figures. The figure closest to
one means it will be a better forecaster. I have tried various
different years, and I get the same results, the errors could have
occurred from a number of things, this could be because in
inaccurate data, or because I tried to forecast before the financial
crisis and the data I have for that period may have been impaired.
6 Conclusion
After analysing both countries by carrying out a number of

tests I found that both countries generated very similar results for
unit root and Cointegration, I have found that because the residuals
at level are stationary and at 1st difference are non stationary shows
that they are not cointegrated, which shows that fisher effect holds
for both countries. For Canada I did expect the fisher effect to hold,
because being a well developed country and for having a good
economy. However for Malaysia I had my doubts because it is still a
developing country in some sense. There is a negative relationship
between nominal interest rates, and inflation. And because they are
not cointegrated at this point, then I do not have to run an error
correction model. Another test for Cointegration I could have used
is Johansen test, but I could have only used this test if I had more
variables which would make it multivariate, but it was not, it was
14
073604149
and Canada
univariate. However I have seen papers and journals that used the
Johansen test for the fisher effect and with univariable data. And an
alternative unit root test I could have done is the Phillips Perron.
And I would have done another forecasting test to just verify the
forecasting accuracy of my regression, and to compare the two
forecasters. I would do this because for the chow forecasting I saw
that both of the regressions are very poor forecasters to predict
future values.
If I were to make changes to this project, I would pick more
variables to make my model multivariate and try the Johnsen test,
because I have heard that it is more sophisticated to use than the
Engle Granger, and gives more of an accurate result. And I would
have chosen two very different countries, for example a developing
country, for example India and a well developed country like the
United Kingdom to see and compare them. Also what would be
interesting to see in these very different countries, that in quarterly
data, how the holidays for the countries may affect the results. For
example in the UK it is a highly Christian populated country so in the
final quarter when Christmas and in the second quarter when Easter
takes place, to see if this has any significance on the results, and
India is a high number of Hindus, and to see whether the results
change in corresponding to their holidays and festivals.
I would have also changed the CPI data, and find another
source to show inflation, because I read that even though I can find
out inflation from calculating the log of CPI, I could get slightly
different results from another source for example if I found the
inflation from the countries GDP data then I might have got different
results, for example my data may not have been stationary at any
point, or may result into the regression being a better forecaster
with a low probability of errors.
Also I think if I had more practice and experience in using
eviews or any other econometrics software, I could execute and
15
073604149
and Canada
interpret more tests and to get better results and more accurate
results.
Appendix of raw data

Nomin CPI Nominal CPI
Time al MLY MLY Can Can
1995q 77.87 86.93333
01 5.03 49 333 7.99
1995q 5.410 78.30 7.3433
02 67 58 87.6 3
1995q 78.83 87.76666 6.4733
03 5.557 79 667 3
1995q 6.017 79.52 87.86666 5.7633
04 33 22 667 3
1996q 80.48 5.1066
01 6.276 51 88.2 7
1996q 6.323 81.16 88.83333 4.6866
02 33 94 333 7
1996q 81.67
03 6.535 62 89 4.14
1996q 6.513 82.18 89.66666 2.8933
04 67 3 667 3
1997q 6.291 83.04 2.9633
01 33 46 90.1 3
1997q 83.17 90.23333
02 6.433 14 333 3
1997q 6.202 83.55 90.53333 3.1833
03 67 15 333 3
1997q 6.701 84.41 90.56666 3.8866
04 33 31 667 7
1998q 5.948 86.61 4.4396
01 67 78 91.1 7
1998q 87.93
02 8.879 56 91.1 4.819
1998q 6.930 88.29 4.9126
03 67 04 91.2 7
1998q 88.94
04 5.698 93 91.6 4.752
1999q 90.06 91.86666 4.7473
01 5.427 43 667 3
1999q 3.104 90.26 92.56666 4.5476
16
073604149
and Canada
02 33 7 667 7
1999q 90.34 93.16666
03 2.837 3 667 4.719
1999q 2.734 90.77 93.76666
04 67 39 667 4.865
2000q 2.747 91.51 94.36666 5.1346
01 33 18 667 7
2000q 2.757 91.54 5.5836
02 33 24 94.8 7
2000q 91.66 95.66666 5.6036
03 2.989 48 667 7
2000q 92.27 5.6373
04 2.951 65 96.7 3
2001q 92.91 96.93333
01 2.85 88 333 4.85
2001q 2.807 92.97
02 33 99 98.2 4.351
2001q 92.91 98.23333 3.6243
03 2.79 88 333 3
2001q 2.721 93.37 97.73333 2.2476
04 33 76 333 7
2002q 2.729 94.26 98.43333 2.1263
01 67 45 333 3
2002q 2.724 94.78
02 67 45 99.5 2.59
2002q 94.84 2.8903
03 2.725 57 100.6 3
2002q 95.02 101.4666
04 2.749 92 667 2.736
2003q 2.796 95.48 102.7666 2.9386
01 33 8 667 7
2003q 2.781 95.64 102.2333 3.1883
02 33 09 333 3
2003q 2.803 95.79 102.7666 2.7016
03 33 38 667 7
2003q 2.772 95.76 2.6516
04 33 32 103.2 7
2004q 96.37 2.1276
01 2.53 49 103.7 7
2004q 2.546 96.74 2.0013
02 67 2 104.5 3
2004q 97.20 104.7666
03 2.457 07 667 2.212
2004q 2.049 98.17 105.5666 2.5386
04 5 95 667 7
2005q 2.347 98.69 105.9666 2.4823
01 5 13 667 3
17
073604149
and Canada
2005q 99.52 106.4333 2.4616

02 2.32 49 333 7
2005q 2.420 100.4 107.4666 2.7173
03 67 58 667 3
2005q 2.848 101.3 3.2413
04 83 25 108 3
2006q 2.946 102.3 108.6666 3.6633
01 67 92 667 3
2006q 103.6 109.1333 4.1496
02 3.102 26 333 7
2006q 104.0 4.1503
03 3.409 26 109.2 3
2006q 3.451 104.3
04 33 93 109.5 4.169
2007q 3.417 105.0 110.6666
01 33 93 667 4.171
2007q 3.389 105.1 111.4333 4.2906
02 67 6 333 7
2007q 3.489 105.8 111.4666 4.2253
03 67 93 667 3
2007q 106.6 112.2333
04 3.438 93 333 3.916
2008q 107.7 112.7333
01 3.374 94 333 2.91
2008q 110.2 2.7066
02 3.439 61 114 7
2008q 114.7 2.2733
03 3.433 95 115.3 3
2008q 112.9 114.3666
04 3.314 95 667 1.67
2009q 111.7 114.0666 0.7166
01 2.377 95 667 67
2009q 111.6
02 1.898 95 114.1 0.23
2009q 1.962 112.1 114.2666 0.2333
03 67 61 667 33
18
073604149
and Canada
Appendix of outputs
Comparison of original data and transformed data.
120 12
CPI MLY CPI Can
LOGCPI_MLY LOGCPI_CAN
10
110
8
100 6
4
90
2
80
0
70 -2
1996 1998 2000 2002 2004 2006 2008 1996 1998 2000 2002 2004 2006 2008
140 12
Nominal Can Nominal MLY
LOGNOMINAL_CAN LOGNOMINAL_MLY
120 10
100
8
80
6
60
4
40
2
20
0 0
1996 1998 2000 2002 2004 2006 2008 1996 1998 2000 2002 2004 2006 2008
Histograms, test for normality.
Log CPI Canada
19
073604149
and Canada
16
Series: LOGCPI_CAN
14 Sample 1995Q1 2009Q4
Observations 60
12
Mean 1.124237
10 Median 1.293021
Maximum 2.078191
8 Minimum -1.514128
Std. Dev. 0.723547
6
Skewness -2.366404
Kurtosis 9.155652
4
Jarque-Bera 150.7288
2
Probability 0.000000
0
-1 0 1 2
Dlogcpi Canada
20
Series: DLOGCPI_CAN
Sample 1995Q1 2009Q4
16 Observations 59
Mean -0.060887
12 Median -0.008358
Maximum 0.199625
Minimum -1.136532
8 Std. Dev. 0.221683
Skewness -2.802828
Kurtosis 12.97633
4
0
-1.2 -1.0 -0.8 -0.6 -0.4 -0.2 -0.0 0.2
Log CPI malaysia
20
073604149
and Canada
10
Series: LOGCPI_MLY
8 Observations 59
Mean 4.546965
6 Median 4.551606
Maximum 4.743148
Minimum 4.355104
4 Std. Dev. 0.103172
Skewness -0.028557
Kurtosis 2.237130
2
0
4.4 4.5 4.6 4.7
Dlogcpi malaysia
14
Series: DLOGCPI_MLY
12 Sample 1995Q1 2009Q4
Observations 58
10
Mean 0.006290
Median 0.005852
8
Maximum 0.040298
Minimum -0.015804
6 Std. Dev. 0.007680
Skewness 1.350618
4 Kurtosis 9.752628
2 Jarque-Bera 127.8287
0
-0.01 0.00 0.01 0.02 0.03 0.04
Log nominal can
21
073604149
and Canada
10
Series: LOGNOMINAL_CAN
8 Observations 60
Mean 4.606131
6 Median 4.605655
Maximum 4.747537
Minimum 4.465142
4 Std. Dev. 0.090665
Skewness 0.041422
Kurtosis 1.620810
2
0
4.45 4.50 4.55 4.60 4.65 4.70 4.75
Dlog nominal Canada
10
Series: DLOGNOMINAL_CAN
8 Observations 59
Mean 0.004786
6 Median 0.004821
Maximum 0.012983
Minimum -0.008128
4 Std. Dev. 0.004417
Skewness -0.479133
Kurtosis 3.348232
2
0
-0.005 0.000 0.005 0.010
log nominal malaysia
22
073604149
and Canada
24
Series: LOGNOMINAL_MLY
20
Observations 59
16 Mean 1.261041
Median 1.094939
Maximum 2.183689
12 Minimum 0.640801
Std. Dev. 0.389120
8 Skewness 0.667480
Kurtosis 2.178807
0
0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2
Dlognominal malaysia
24
Series: DLOGNOMINAL_MLY
20
Observations 58
16 Mean -0.016226
Median -0.001790
Maximum 0.400521
12 Minimum -0.558589
Std. Dev. 0.124558
8 Skewness -1.255697
Kurtosis 10.05003
0
-0.6 -0.4 -0.2 -0.0 0.2 0.4
Autocorrelation function of the variables.
Log and dlog of CPI of Canada at level
log and dlog of CPI Canada at 1st difference
23
073604149
and Canada
log and dlog of CPI malaysia level
log and dlog of CPI malaysia at 1st difference
log and dlog of nominal interest in Canada level
24
073604149
and Canada
log and dlog of nominal interest rates in Canada 1st difference
log and dlog of nominal interest rates in malaysia level
log and dlog of nominal interest rates in malaysia 1st difference
25
073604149
and Canada
Cointegration
White Test
White test for Canada:
Heteroskedasticity Test: White
15.6675
F-statistic 5 Prob. F(2,57) 0.0000
21.2838 Prob. Chi-
Obs*R-squared 0 Square(2) 0.0000
Scaled 61.3658 Prob. Chi-
explained SS 7 Square(2) 0.0000
Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 04/17/10 Time: 23:30
Sample: 1995Q1 2009Q4
Included observations: 60
Coefficie
Variable nt Std. Error t-Statistic Prob.
1091.27
C 4 298.0955 3.660821 0.0006
-
LOGNOMINAL_C 477.829 -
AN 0 129.4198 3.692087 0.0005
LOGNOMINAL_C 52.2983
AN^2 0 14.04255 3.724274 0.0005
0.35473 Mean dependent 0.3379

R-squared 0 var 05
Adjusted R- 0.33208 S.D. dependent 0.8464
squared 9 var 90
26
073604149
and Canada
S.E. of 0.69180 Akaike info 2.1496

regression 1 criterion 70
Sum squared 27.2795 2.2543
resid 7 Schwarz criterion 88
-
61.4901 Hannan-Quinn 2.1906
Log likelihood 1 criter. 31
F-statistic 15.6675
Heteroskedasticity Test: WhiteDurbin-Watson 0.4230
5 stat 25
Prob(F-statistic) 4.43323
0.00000
F-statistic 4 Prob. F(2,56)
4 0.0163
8.06459 Prob. Chi-
Obs*R-squared 2 Square(2) 0.0177
Scaled 5.95977 Prob. Chi- White Test
explained SS 2 Square(2) 0.0508 for Malaysia
Test Equation:
Dependent Variable: RESID^2
Date: 04/17/10 Time: 23:32 Regression
Regression
Sample: for Canada:
1995Q1 2009Q3
Dependent Variable: LOGCPI_CAN
Coefficie
Date:Variable
04/17/10 Time: 23:10nt Std. Error t-Statistic Prob.
Sample: 1995Q1 2009Q4
Included observations: 60-
0.03053 -
C
Variable 8 0.012416
Coefficie Std. Error 2.459677
t-Statistic 0.0170
Prob.
LOGNOMINAL_M 0.05665 nt
LY 0 0.019105 2.965162 0.0044
C 22.6717- 3.911218 5.796597 0.0000
LOGNOMINAL_M 0.02031 5 -
LOGNOMINAL_C
LY^2 6- 0.006825
0.848971 2.976605- 0.0000
0.0043
AN 4.67800 5.510207
0.13668 7 Mean dependent 0.0055
R-squared 8 var 68
R-squared
Adjusted R- 0.34361 S.D.
0.10585 Meandependent
dependent 1.1242
0.0070
squared 2 var
5 var 37
67
Adjusted R- 0.33229 S.D. dependent 0.7235-
squared
S.E. of 0.00668 5 varAkaike info 47
7.1292
S.E. of
regression 0.59123 Akaike info
2 criterion 1.8195
15
regression 4 criterion 55-
Sum squared
Sum squared 20.2743 Schwarz criterion
0.00250 1.8893
7.0235
resid
resid 3 Schwarz criterion
1 66
78
Log likelihood - Hannan-Quinn 1.8468-
213.311 criter.
52.5866 Hannan-Quinn 62
7.0879
4.43323 Durbin-Watson
27 0.4974
F-statistic 4 stat 35
0.01631
Prob(F-statistic) 9
073604149
and Canada
4
30.3623 Durbin-Watson 0.1549
0.00000
Prob(F-statistic) 1
Regression for malaysia:
Dependent Variable: LOGCPI_MLY

Date: 04/17/10 Time: 23:14
Sample (adjusted): 1995Q1 2009Q3
Included observations: 59 after adjustments
Coefficie
Variable nt Std. Error t-Statistic Prob.
4.77567
C 7 0.033783 141.3643 0.0000
-
LOGNOMINAL_M 0.18136 -
LY 8 0.025617 7.079841 0.0000
0.46790 Mean dependent 4.5469

R-squared 7 var 65
Adjusted R- 0.45857 S.D. dependent 0.1031
squared 2 var 72
-
S.E. of 0.07591 Akaike info 2.2850
regression 6 criterion 65
-
Sum squared 0.32850 2.2146
resid 6 Schwarz criterion 40
-
69.4094 Hannan-Quinn 2.2575
50.1241 Durbin-Watson 0.1143
0.00000
Prob(F-statistic) 0
Augmented dickey fuller tests on residuals

For Canada at level:
Null Hypothesis: RESIDCAN has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 1 (Automatic based on AIC, MAXLAG=10)
28
073604149
and Canada
t-Statistic Prob.*
Augmented Dickey-Fuller test -

statistic 1.969410 0.6053
Test critical -
values: 1% level 4.124265
-
5% level 3.489228
10% -
level 3.173114
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation

Dependent Variable: D(RESIDCAN)
Date: 04/17/10 Time: 23:47
Canada at 1st difference:

Null Hypothesis: D(RESIDCAN) has a unit root
t-Statistic Prob.*

statistic 4.350184 0.0054
Test critical -
-
5% level 3.490662
10% -
level 3.173943

Dependent Variable: D(RESIDCAN,2)
Date: 04/17/10 Time: 23:47
29
073604149
and Canada
And my results for Malaysia at level is:
Null Hypothesis: RESID01 has a unit root

t-Statistic Prob.*

statistic 2.166312 0.4986
Test critical -
-
5% level 3.490662
10% -
level 3.173943

Dependent Variable: D(RESID01)
Date: 04/17/10 Time: 23:41
And at 1st difference:

Null Hypothesis: D(RESID01) has a unit root
t-Statistic Prob.*

statistic 6.192455 0.0000
Test critical -
-
5% level 3.490662
10% -
level 3.173943

Dependent Variable: D(RESID01,2)
30
073604149
and Canada

Date: 04/17/10 Time: 23:41
Chow Forecasting
Chow forecaseting from 2005Q1 for Canada:

Chow Forecast Test: Forecast from 2005Q1 to 2009Q4
F-statistic 12.85481 Prob. F(20,38) 0.0000

Log likelihood ratio 122.9829 Prob. Chi-Square(20) 0.0000
Test Equation:
Dependent Variable: LOGCPI_CAN
Date: 04/30/10 Time: 14:28
Sample: 1995Q1 2004Q4
Variable Coefficient Std. Error t-Statistic Prob.
C 21.29822 3.187329 6.682154 0.0000

LOGNOMINAL_CAN -4.383027 0.699893 -6.262427 0.0000
R-squared 0.507887 Mean dependent var 1.339495

Adjusted R-squared 0.494936 S.D. dependent var 0.368823
S.E. of regression 0.262115 Akaike info criterion 0.208638
Sum squared resid 2.610757 Schwarz criterion 0.293082
Log likelihood -2.172758 Hannan-Quinn criter. 0.239170
F-statistic 39.21799 Durbin-Watson stat 0.301117
Chow forecaseting from 2005Q1 for Malaysia:
Chow Forecast Test: Forecast from 2005Q1 to 2009Q3
F-statistic 9.423081 Prob. F(19,38) 0.0000

Log likelihood ratio 102.8068 Prob. Chi-Square(19) 0.0000
Test Equation:
Dependent Variable: LOGCPI_MLY
Date: 04/30/10 Time: 14:26
Sample: 1995Q1 2004Q4
Variable Coefficient Std. Error t-Statistic Prob.
31
073604149
and Canada
C 4.677912 0.020858 224.2786 0.0000

LOGNOMINAL_MLY -0.138210 0.014736 -9.379237 0.0000
R-squared 0.698341 Mean dependent var 4.490985

Adjusted R-squared 0.690403 S.D. dependent var 0.069920
S.E. of regression 0.038905 Akaike info criterion -3.606692
Sum squared resid 0.057516 Schwarz criterion -3.522248
Log likelihood 74.13384 Hannan-Quinn criter. -3.576160
F-statistic 87.97009 Durbin-Watson stat 0.255183
Bibliography
Johnson, P.A. (2006), ‘Is there really the Fisher effect?’, Applied
Economics Letters 13, pp. 201-203.
Perez, S.J. and M.V. Siegler (2003), ‘Inflationary expectations and

the Fisher effect prior to World War I’, Journal of Money, Credit and
Banking 35, pp. 947-965.
Fahmy, Y.A.F. and M. Kandil (2003), ‘The Fisher effect: new evidence
and implications’, International Review of Economics and Finance
12, pp. 451-465.
Gujarati D.N. (1995), Basic Econometrics, 3rd edition, McGraw-Hill

International Editions.
Mankiw,N.G. (2000), Macroeconomics, 4th edition, Worth Publishers,

chapters 7 and 18.
Arusha Cooray (2002), ‘THE FISHER EFFECT: A REVIEW OF THE

LITERATURE’ . (http://www.econ.mq.edu.au/research/2002/6-
2002Cooray.PDF)
32

Assignment Fisher 1

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Assignment Fisher 1

Uploaded by

Copyright:

Available Formats

Testing the

For my project, I wish to test, forecast and compare to see if

2.0 Economics Theory

The fisher effect was introduced in 1930, and it shows the

The purchasing power can be found by finding the difference

the more accurate fisher effect equation is written as:

where π et is the expected inflation rate. Once the nominal interest

The fisher effect hypothesis says that the efficient capital

2.1 Econometric Theory

it= πte+rt+e where rt=it- πte

Changes in expected rate of inflation are shown by nominal interest

3.0 Literature review

In another paper, ‘the fisher effect: new evidence and

Perez, S.J and M.V Siegler (2003) performed similar studies

A paper published by Arusha Cooray ‘THE FISHER EFFECT: A

cointegration approach, there was a presence of a relationship

4.0 Description of my data.

Below is a list of my data that I have used, and the

Cpi_mly: CPI Malaysia

Cpi_can: CPI Canada

I collected my data from two different sources; I got data from

quarterly data from 1999 to 2009, which is not as much as I would

First I will show a comparison of my regular data and my

5.1 Comparison of original data and transformed data.

In the appendix the plotted variables are against their logged

graphs show that there isn’t a structural break, and it follows a

5.2 Histograms, Test for normality.

As you can see my histograms in the appendix for all of my log

variables they are not normally distributed, therefore the variables

5.3 Stationary properties of variables

To test whether my data for stationarity, I used the ADF test

5.4 Autocorrelation function of the variables.

The autocorrelation function (ACF) of a variable expresses the

Cointegration is and econometric property for time series

Now I will do the engel granger method for Cointegration. The

The two regression tables shown in the appendix shows the

1.96941 3.48922 3.49066

5.6 Chow Forecasting

The Chow test was invented by economist Gregory Chow. In

My chow forecasting output is summerised below:

After analysing both countries by carrying out a number of

Appendix of raw data

2005q 99.52 106.4333 2.4616

Histograms, test for normality.

Log CPI Canada

Log CPI malaysia

Log nominal can

Dlog nominal Canada

log nominal malaysia

Autocorrelation function of the variables.

Log and dlog of CPI of Canada at level

log and dlog of CPI Canada at 1st difference

log and dlog of CPI malaysia level

log and dlog of CPI malaysia at 1st difference

log and dlog of nominal interest in Canada level

log and dlog of nominal interest rates in Canada 1st difference

log and dlog of nominal interest rates in malaysia level

log and dlog of nominal interest rates in malaysia 1st difference

Heteroskedasticity Test: White

0.35473 Mean dependent 0.3379

S.E. of 0.69180 Akaike info 2.1496

Regression for malaysia:

Dependent Variable: LOGCPI_MLY