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Fisher’s Effect: An Empirical Examination Using India’s Time Series Data

Author

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  • Jamaladeen Abubakar

    (University of Madras)

  • K. Jothi Sivagnanam

    (University of Madras)

Abstract

The study examines the Fisher’s hypothesis using India’s macroeconomic data with main objective of ascertaining the empirical relationship between nominal interest rate and expected inflation. The study collected monthly time series data on interest rate (lending rate) and CPI growth rate (inflation) from Reserve Bank of India’s database spanning from 1990M01 to 2015M03. To achieve the objective, the study first examined the univariate stochastic properties of the series using test that assumed the presence of structural: Zivot and Andrews (J Bus Econ Stat 10(3):251–270, 1992) and Perron (J Econ 80:355–385, 1997) on one hand and those that assumed no break: Elliot et al. (Econometrica 64:813–836, 1996) and Kwiatkowski et al. (J Econom 54:159–178, 1992) on the other hand. The result for the univariate stochastic properties revealed that inflation is level stationary whereas lending rate is differenced stationary. This finding is consistent with the two tests considered as mentioned above. To examined the Fisher’s effect, given the result of the univariate stochastic properties, the study checked the multivariate counterpart using test that assumed break; Gregory and Hensen (J Econom 70:99–126, 1996) and the one that assumed no break; Pesaran et al. (J Appl Econom 16:289–326, 2001). The result reveals the absence of long run equilibrium between nominal interest rate and inflation for the full and sub-samples which is against Fisher’s proposition. This finding can be attributed to the following reasons: firstly, the conduct of monetary policy by RBI is passive; that is, the policy rate response less than proportionate to change in inflation. Secondly, the presence of distortion in the interest rate pass-through channel makes the sign, speed and magnitude of monetary policy uncertain and finally, the dominant of informal financial sector in India that makes short term policy rate ineffective monetary policy instrument. Therefore the study concludes that the conduct of monetary policy is responsible for the rejection of Fisher’s hypothesis in India.

Suggested Citation

  • Jamaladeen Abubakar & K. Jothi Sivagnanam, 2017. "Fisher’s Effect: An Empirical Examination Using India’s Time Series Data," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 15(3), pages 611-628, September.
    • Handle: RePEc:spr:jqecon:v:15:y:2017:i:3:d:10.1007_s40953-016-0065-0
    DOI: 10.1007/s40953-016-0065-0
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    References listed on IDEAS

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    Cited by:

    1. Masudul Hasan Adil & Shadab Danish & Sajad Ahmad Bhat & Bandi Kamaiah, 2020. "Fisher Effect: An Empirical Re-examination in Case of India," Economics Bulletin, AccessEcon, vol. 40(1), pages 262-276.
    2. Swapnil Suryavanshi, 2023. "A study of Fisher Effect in India," Indian Economic Review, Springer, vol. 58(2), pages 485-503, September.

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    More about this item

    Keywords

    Unit root; Co-integration; Fisher’s effect; Inflation; Interest rate;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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