The Relationship between Nominal Interest Rates and Inflation: New Evidence and Implication for Nigeria
AbstractThis paper investigates the relationship between expected inflation and nominal interest rates in Nigeria and the extent to which the Fisher effect hypothesis holds, for the period 1970-2009. The real interest rate is obtained by subtracting the expected inflation rate from the nominal interest rate. For the Fisher hypothesis to hold, the resultant ex ante real interest rate should be stationary. Using the Johansen Cointegration Approach and Error Correction Mechanism, our findings tend to suggest: (i) the real interest rates is stationary (ii) that the nominal interest rates and expected inflation move together in the long run but not on one-to-one basis. This indicates that full Fisher hypothesis does not hold but there is a very strong Fisher effect in the case of Nigeria over the period under study (iii) that causality run strictly from expected inflation to nominal interest rates as suggested by the Fisher hypothesis and there is no “reverse causation” (iv) that only about 16 percent of the disequilibrium between long term and short term interest rate is corrected within the year. Policy implication, based on the partial Fisher effect in Nigeria, is that the level of actual inflation should become the central target variable of the monetary policy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 49684.
Date of creation: Aug 2012
Date of revision:
Fisher Effect; Co-integration; Error Correction Model; Nigeria;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
- Booth, G. Geoffrey & Ciner, Cetin, 2001. "The relationship between nominal interest rates and inflation: international evidence," Journal of Multinational Financial Management, Elsevier, vol. 11(3), pages 269-280, July.
- Muscatelli, Vito Antonio & Spinelli, Franco, 2000. "Fisher, Barro, and the Italian Interest Rate, 1845-93," Journal of Policy Modeling, Elsevier, vol. 22(2), pages 149-169, March.
- Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
- Frederic S. Mishkin & John Simon, 1994.
"An Empirical Examination of the Fisher Effect in Australia,"
RBA Research Discussion Papers
rdp9410, Reserve Bank of Australia.
- Mishkin, Frederic S & Simon, John, 1995. "An Empirical Examination of the Fisher Effect in Australia," The Economic Record, The Economic Society of Australia, vol. 71(214), pages 217-29, September.
- Frederic S. Mishkin & John Simon, 1997. "An Empirical Examination of the Fisher Effect in Australia," NBER Working Papers 5080, National Bureau of Economic Research, Inc.
- Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
- Koustas, Z., Serletis, A., 1998.
"On the Fisher Effect,"
98-09, Calgary - Department of Economics.
- Noor Ghazali & Shamshubariah Ramlee, 2003. "A long memory test of the long-run Fisher effect in the G7 countries," Applied Financial Economics, Taylor and Francis Journals, vol. 13(10), pages 763-769.
- Garcia, Marcio G. P., 1993. "The Fisher effect in a signal extraction framework The recent Brazilian experience," Journal of Development Economics, Elsevier, vol. 41(1), pages 71-93, June.
- Fahmy, Yasser A. F. & Kandil, Magda, 2003. "The Fisher effect: new evidence and implications," International Review of Economics & Finance, Elsevier, vol. 12(4), pages 451-465.
- Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- Godwin Nwaobi, 2002.
"A vector error correction and nonnested modeling of money demand function in Nigeria,"
AccessEcon, vol. 3(4), pages 1-8.
- Godwin Nwaobi, 2001. "A Vector Error Correction And Nonnested Modelling Of Money Demand Function In Nigeria," Econometrics 0111004, EconWPA.
- Oscar Bajo-Rubio & Carmen Díaz-Roldán & Vicente Esteve, 2003.
"Testing the Fisher Effect in the Presence of Structural Change: A Case Study of the UK,1961-2001,"
Economic Working Papers at Centro de Estudios Andaluces
E2003_22, Centro de Estudios Andaluces.
- O Bajo-Rubio & C Diaz-Roldan & V Esteve, 2010. "Testing the Fisher effect in the presence of structural change: A case study of the UK, 1966-2007," Economic Issues Journal Articles, Economic Issues, vol. 15(2), pages 1-16, September.
- Frank J. Atkins & Apostolos Serletis, 2003. "Bounds Tests of the Gibson Paradox and the Fisher Effect: Evidence from Low-Frequency International Data," Manchester School, University of Manchester, vol. 71(6), pages 673-679, December.
- Paul Johnson, 2006.
"Is it really the Fisher effect?,"
Applied Economics Letters,
Taylor and Francis Journals, vol. 13(4), pages 201-203.
- Johnson, Paul, 2004. "Is it Really the Fisher Effect?," Vassar College Department of Economics Working Paper Series 58, Vassar College Department of Economics.
- repec:ebl:ecbull:v:3:y:2002:i:4:p:1-8 is not listed on IDEAS
- Jeung-Lak Lee & Carolyn Clark & Sung Ahn, 1998. "Long- and short-run Fisher effects: new tests and new results," Applied Economics, Taylor & Francis Journals, vol. 30(1), pages 113-124.
- K. M. Hawtrey, 1997. "The Fisher effect and Australian interest rates," Applied Financial Economics, Taylor and Francis Journals, vol. 7(4), pages 337-346.
- Taijfiq Choudhry, 1997. "Cointegration analysis of the inverted Fisher effect: evidence from Belgium, France and Germany," Applied Economics Letters, Taylor and Francis Journals, vol. 4(4), pages 257-260.
- Ky-Hyang Yuhn, 1996. "Is the Fisher effect robust? Further evidence," Applied Economics Letters, Taylor and Francis Journals, vol. 3(1), pages 41-44.
- Francisco Carneiro & Jose Angelo & C. A. Divino & Carlos Rocha, 2002. "Revisiting the Fisher hypothesis for the cases of Argentina, Brazil and Mexico," Applied Economics Letters, Taylor and Francis Journals, vol. 9(2), pages 95-98.
- Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-18, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.