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.
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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
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