[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/pid/journl/v38y1999i2p153-166.html
   My bibliography  Save this article

Fisher Effect in Pakistan

Author

Listed:
  • Hamid Hasan

    (International Institute of Islamic Economics, International Islamic University, Islamabad.)

Abstract
This paper attempts to test the validity of the Fisher Hypothesis (FH) in Pakistan by investigating the long-run relationship between interest rate and inflation rate applying cointegration analysis. The FH has serious implications for debtors and creditors in an inflation prone economy since inflationary expectations influence nominal interest rate. Moreover, the effectiveness of monetary policy and efficiency in banking sector has direct bearing on the long-run relationship between nominal interest rate and expected inflation rate. Inflationary expectation has been modeled using adaptive and rational expectation approaches and sensitivity of the result to expectation formation has been compared. The paper finds the long-run relationship between nominal interest rate and inflation rate and accepts the partial Fisher Hypothesis. This result suggests that interest rate does not fully cover or accurately anticipate inflation, which implies that bank deposits deteriorate over time. The result further implies that monetary policy may not be effective in such a situation and households’ savings rate may suffer a decline. The acceptance of partial Fisher Hypothesis in case of rational expectation suggests that the rate of interest does not reflect all relevant information and real interest rate does not exhibit random walk behaviour, which is indicative of inefficiency in banking sector. The analysis clearly shows the failure of interest rate as a hedge against inflation and as a predictor of inflation. Therefore, the paper recommends innovation and financial engineering for better alternative especially in banking. The paper also recommends the growth and encouragement of equity market vis-à-vis prevalent debt-biased market. Finally, the paper advocates the complete replacement of traditional credit-based banking by more efficient trade-based banking in Pakistan.

Suggested Citation

  • Hamid Hasan, 1999. "Fisher Effect in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 38(2), pages 153-166.
    • Handle: RePEc:pid:journl:v:38:y:1999:i:2:p:153-166
    as

    Download full text from publisher

    File URL: http://www.pide.org.pk/pdf/PDR/1999/Volume2/153-166.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Pesando, James E, 1979. "On the Random Walk Characteristics of Short- and Long-Term Interest Rates in an Efficient Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(4), pages 457-466, November.
    2. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-282, June.
    3. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    4. Thomas J. Sargent, 1972. "Anticipated Inflation and the Nominal Rate of Interest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 86(2), pages 212-225.
    5. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, vol. 55(5), pages 1035-1056, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Siffat Mushtaq & Abdul Rashid & Abdul Qayyum, 2012. "On the Welfare Cost of Inflation: The Case of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 51(1), pages 61-96.
    2. Mpho Bosupeng, 2015. "The Fisher Effect Using Differences in The Deterministic Term," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 5(4), pages 1031-1031.
    3. Bilal Raza & Khurram S Mughal, 2022. "Fiscal Determinants of Inflation in Pakistan," SBP Working Paper Series 108, State Bank of Pakistan, Research Department.
    4. S, Surayya, 2018. "Alternative Specifications of Fisher Hypothesis: An Empirical Investigation," MPRA Paper 90320, University Library of Munich, Germany.
    5. Bosupeng, Mpho, 2016. "The Effects of Chinese Interest Rates and Inflation: A Decomposition of The Fisher Effect," MPRA Paper 78160, University Library of Munich, Germany, revised 2016.
    6. Jalil, Abdul & Tariq, Rabbia & Bibi, Nazia, 2014. "Fiscal deficit and inflation: New evidences from Pakistan using a bounds testing approach," Economic Modelling, Elsevier, vol. 37(C), pages 120-126.
    7. Bosupeng, Mpho, 2016. "On The Fisher Effect: A Review," MPRA Paper 77916, University Library of Munich, Germany, revised 2016.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Neil R. Ericsson, 2021. "Dynamic Econometrics in Action: A Biography of David F. Hendry," International Finance Discussion Papers 1311, Board of Governors of the Federal Reserve System (U.S.).
    2. Crowder, William J., 1995. "Covered interest parity and international capital market efficiency," International Review of Economics & Finance, Elsevier, vol. 4(2), pages 115-132.
    3. Khosrow Doroodian & Chulho Jung & Roy Boyd, 1999. "Testing the law of one price under the fixed and flexible exchange rate systems," Applied Economics Letters, Taylor & Francis Journals, vol. 6(9), pages 613-616.
    4. Abdul Qayyum, 2000. "Demand for Real Money Balances by the Business Sector: An Econometric Investigation," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 39(4), pages 857-873.
    5. Quintos, Carmela E., 1998. "Analysis of cointegration vectors using the GMM approach," Journal of Econometrics, Elsevier, vol. 85(1), pages 155-188, July.
    6. Xiao, Zhijie, 1999. "A residual based test for the null hypothesis of cointegration," Economics Letters, Elsevier, vol. 64(2), pages 133-141, August.
    7. Ericsson, Neil R., 1992. "Cointegration, exogeneity, and policy analysis: An overview," Journal of Policy Modeling, Elsevier, vol. 14(3), pages 251-280, June.
    8. Karen K. Lewis & Martin D. Evans, 1992. "Do Expected Shifts in Inflation Policy Affect Real Rates?," NBER Working Papers 4134, National Bureau of Economic Research, Inc.
    9. Javier Fernandez-Macho, 2013. "A wavelet approach to multiple cointegration testing," Economics Series Working Papers 668, University of Oxford, Department of Economics.
    10. Mpho Bosupeng, 2015. "The Fisher Effect Using Differences in The Deterministic Term," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 5(4), pages 1031-1031.
    11. Phylaktis, Kate, 1997. "Capital market integration in the Pacific-Basin region: An analysis of real interest rate linkages," Pacific-Basin Finance Journal, Elsevier, vol. 5(2), pages 195-213, June.
    12. Phylaktis, Kate, 1999. "Capital market integration in the Pacific Basin region: an impulse response analysis," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 267-287, February.
    13. Bosupeng, Mpho, 2016. "The Effects of Chinese Interest Rates and Inflation: A Decomposition of The Fisher Effect," MPRA Paper 78160, University Library of Munich, Germany, revised 2016.
    14. Hassler Uwe, 2001. "Wealth and Consumption. A Multicointegrated Model for the Unified Germany / Vermögen und Konsum. Ein multikointegriertes Modell für das vereinigte Deutschland," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 221(1), pages 32-44, February.
    15. Carone, Giuseppe, 1996. "Modeling the U.S. demand for imports through cointegration and error correction," Journal of Policy Modeling, Elsevier, vol. 18(1), pages 1-48, February.
    16. Hallin, M. & van den Akker, R. & Werker, B.J.M., 2012. "Rank-based Tests of the Cointegrating Rank in Semiparametric Error Correction Models," Other publications TiSEM bc68a2f2-3ca3-443c-b3ac-f, Tilburg University, School of Economics and Management.
    17. Committee, Nobel Prize, 2003. "Time-series Econometrics: Cointegration and Autoregressive Conditional Heteroskedasticity," Nobel Prize in Economics documents 2003-1, Nobel Prize Committee.
    18. Josefa Ramoni Perazzi & Giampaolo Orlandoni Merli, 1999. "A long run consumption model for Venezuela," Economía, Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela, vol. 24(15), pages 127-138, January-D.
    19. Charles G. Renfro, 2009. "The Practice of Econometric Theory," Advanced Studies in Theoretical and Applied Econometrics, Springer, number 978-3-540-75571-5.
    20. Wong Keung-Wing & Habibullah Khan & Jun Du, 2006. "Money, Interest Rate and Stock Prices: New Evidence from Singapore and The United States," Departmental Working Papers wp0601, National University of Singapore, Department of Economics.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pid:journl:v:38:y:1999:i:2:p:153-166. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Khurram Iqbal (email available below). General contact details of provider: https://edirc.repec.org/data/pideipk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.