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Toda-Yamamoto Causality Test between Inflation and Nominal Interest Rates: Evidence from Three Countries of Europe

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  • Chaido Dritsaki

    (Department of Accounting and Finance, Western Macedonia University of Applied Sciences, Kozani 50100, Greece.)

Abstract

This paper investigates the relationship between inflation and nominal interest rates for three European countries, Germany (member of EMU), Great Britain (member country of EU but not EMU) and Switzerland (a non-EU country) from January 1995 until May 2015. For testing the long run equilibrium relationship we use the ARDL cointegration technique (Autoregressive Distributed Lag) developed by Pesaran et al. (2001) as well as Granger no-causality approach developed by Toda and Yamamoto (1995) in a two-variable vector autoregression (VAR) model. The results of ARDL approach (bound test) shown that there is a cointegrated vector for the three examined countries thus Fisher assumption is valid. Finally, the results of Toda and Yamamoto approach show that the nominal interest rate has a positive relationship and affects inflation on a large scale in the three countries that we study, while inflation influences interest rate only in Germany.

Suggested Citation

  • Chaido Dritsaki, 2017. "Toda-Yamamoto Causality Test between Inflation and Nominal Interest Rates: Evidence from Three Countries of Europe," International Journal of Economics and Financial Issues, Econjournals, vol. 7(6), pages 120-129.
    • Handle: RePEc:eco:journ1:2017-06-15
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    References listed on IDEAS

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    4. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    5. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-1088, October.
    6. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 266-276, June.
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    More about this item

    Keywords

    Fisher Effect; ARDL Cointegration Test; Error Correction Model; Toda-Yamamoto Causality Test;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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