Maintaining a low rate of inflation is very important to achieve sustainable economic growth but is a challenging task for policy makers. Interest rates are one of the main channels through which monetary policy changes can be used to achieve this goal of low inflation. Thus, a significant relationship between interest rates and inflation reveals the effectiveness of monetary policy in controlling inflation. The "Fisher hypothesis" provides a theoretical basis for this relationship. This hypothesis states the nominal interest rate rises one-for-one with inflationary expectations, maintaining, other things being constant, a constant real interest rate. The aim of this study is to test the Fisher hypothesis in Sri Lanka with the aid of recently introduced econometric tools for the period January 1986 to December 1995, using monthly data. Even though the current inflation rate in Sri Lanka is not as high as in most developing countries, maintaining a low inflation rate receives a high priority in the Sri Lankan Government's policy agenda.
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Paper provided by La Trobe - Department of Economics in its series Papers with number
00.03.
Find related papers by JEL classification: E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data) E00 - Macroeconomics and Monetary Economics - - General - - - General