Testing an Augmented Fisher Hypothesis for a Small Open Economy : The Case of Finland

We augment the famous Fisher hypothesis for a small open economy by introducing foreign interest rate and exchange variables to the traditional test equation of the hypothesis. Using the Johansen cointegration method for the Finnish money market interest rate data we find it is possible to find a positive long-run relationship between nominal interest rates and inflation. We also find that for a small open economy, like Finland, the effects from the corresponding markets of its main foreign trade partners are important when analyzing single macroeconomic hypotheses, like the Fisher hypothesis