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Fisher Effect: An Empirical Re-examination in Case of India

Author

Listed:
  • Masudul Hasan Adil

    (Mumbai School of Economics and Public Policy (Autonomous), University of Mumbai)

  • Shadab Danish

    (University of Hyderabad)

  • Sajad Ahmad Bhat

    (University of Hyderabad)

  • Bandi Kamaiah

    (University of Hyderabad)

Abstract

This study examines the Fisher's hypothesis by utilizing the dataset on India's macroeconomic variables with the objective to check whether long-run empirical relationship between the nominal interest rate and inflation expectation exists. To this end, study is conducted on monthly data from Jan-1993 to Mar-2015 by utilizing the autoregressive distributed lag model or bounds testing approach developed by Pesaran, Shin, and Smith (2001). The bounds testing is applied to analyze the co-integration and short-and long-run relationship among variables, for a different combination of the Fisher hypothesis. The present study concludes the existence of a long-run relationship between Treasury bill and expected inflation (estimated by WPI), with a long-run coefficient equal to 0.54, implying partial Fisher effect. While the long-run relationship does not exist between Treasury bill and expected inflation (estimated by CPI). Similarly, long-run relationship although not of one to one in nature, between call money rate and expected inflation (estimated by WPI), is found with a coefficient equal to 0.51; but not for any another combination. The implication of the result shows that the market interest rate is a good indicator of inflationary expectations (i.e. WPI). And the conduct of monetary policy is responsible for favoring the partial Fisher's effect in India.

Suggested Citation

  • 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.
  • Handle: RePEc:ebl:ecbull:eb-19-00590
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    References listed on IDEAS

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    More about this item

    Keywords

    Bounds test; Cointegration; Fisher effect/hypothesis; Rational expectation; India;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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