This paper empirically investigates the Fisher effect in selected ECOWAS countries by employing annual data from 1961 to 2011. The inflation and interest rates for Burkina Faso, C?te d’Ivoire, Gambia, Ghana, Niger, Nigeria, Senegal and Togo are used in the study. Firstly, we investigate the order of integration of the 16 time series using the augmented Dickey-Fuller (ADF), Phillips-Perron (PP) and the Kwiatkowski-Phillips-Schmidt-Shin (KPSS) unit root tests as a confirmatory test. Our empirical results indicate that inference based on the ADF and the Phillips-Perron test displays a considerable degree of robustness to the method of lag selection and the correction for heteroskedasticity and autocorrelation adopted, however, the robustness of the KPSS test to the method of computation of the long-run variance seems to be weak. On allowing for structural breaks, we found more evidence against the unit root hypothesis. Secondly, the Fisher equation is cast in the state space framework and the Kalman filter is applied to estimate the slope parameter. Our state space model results indicate that the strength of the Fisher effect does vary over time. For the ECOWAS countries; in some periods there appears to be a full Fisher effect, while in other periods, the relationship seems to be partial and non-existing at some other periods. The Harvey-Koopman procedure is also employed to detect the time of structural breaks and outliers in the state space model. We recommend that monetary authorities in the ECOWAS countries should aimed at making effective monetary policies and demonstrate strong commitments to monetary targets in order to strengthen the Fisher relation.
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