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 introdu cing foreign interest rate and exchange variables to the traditional test e quation of the hypothesis. Using the Johansen cointegration method for the Finnish money market interest rate data we find that it is possible to find a positive long-run relationship between nominal interest rates and inflat ion. We also find that for a small open economy, like Finland, the effects from the corresponding markets of its main foreign trade partners are impor tant when analyzing single macroeconomic hypotheses, like the Fisher hypoth esis.