A panel data analysis of the fisher effect: Evidence from the selected developed countries

Lian , Chee Yong (2012) A panel data analysis of the fisher effect: Evidence from the selected developed countries. Masters thesis, Universiti Malaysia Sabah.

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Abstract

The main objective of this study is to evaluate the Fisher effect existing between nominal interest rates and inflation rates in selected developed countries, namely Australia, Canada, Germany, Japan, United Kingdom (UK), and United State (US). The nominal interest rates are combination of inflation rates and real interest rates. This quantitative study analyses a panel of annual data from 1975 to 2008 for six major countries. There are 34 observations for each country and total of 204 observations in this study. The panel co-integration test used is to test the long run relationship. This study finds that there are significant long run relationship between the inflation rate and nominal interest rate. Panel ordinary least square also significantly proves the strong positive relationship for these two variables. The vector error correction model (VECM) designed to be used with series that are known to be co-integrated. The result indicates that there is short run relationship between the inflation rate and nominal interest rate. In order to evaluate the causality, the Granger causality test had been used. It suggests that there is bidirectional Granger causality. This implies that nominal interest rate and inflation rate are affecting each other. Overall conclusions from the results suggest that the policy makers should depending on the level of inflation. Whenever the inflation rate decreases below a level of tolerable inflation, the policy makers will conduct an active policy by changing nominal rates which is consistent with a stance of inflation targeting. However, in a context of increasing inflation, the monetary authorities change nominal interest rates so that inflation rates will return to acceptable values.

Item Type:Thesis (Masters)
Uncontrolled Keywords:fisher effect, develop countries, nominal interest, inflation rates
Subjects:H Social Sciences > HB Economic Theory
Divisions:SCHOOL > School of Business and Economics
ID Code:6094
Deposited By:IR Admin
Deposited On:27 May 2013 08:31
Last Modified:27 May 2013 08:31

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