Fisher Effect in Pakistan

1999 ◽  
Vol 38 (2) ◽  
pp. 153-166 ◽  
Author(s):  
Hamid Hasan
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Inflation Rate ◽  
Banking Sector ◽  
Rational Expectation ◽  
Nominal Interest Rate ◽  
Complete Replacement ◽  
Long Run ◽  
Fisher Hypothesis ◽  
Savings Rate

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.

scholarly journals MONETARY POLICY AND ENDOGENOUS MARKET STRUCTURE IN A SCHUMPETERIAN ECONOMY

2014 ◽  
Vol 20 (5) ◽  
pp. 1127-1145 ◽  
Author(s):  
Angus C. Chu ◽  
Lei Ji
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Interest Rate ◽  
Market Structure ◽  
Firm Size ◽  
Growth Effect ◽  
Nominal Interest Rate ◽  
Long Run ◽  
Endogenous Market Structure ◽  
Number Of Firms

This study develops a monetary Schumpeterian model with endogenous market structure (EMS) to explore the effects of monetary policy on the number of firms, firm size, economic growth, and social welfare. EMS leads to different results from previous studies in which market structure is exogenous. In the short run, a higher nominal interest rate reduces the growth rates of innovation, output, and consumption and decreases firm size through reduction in labor supply. In the long run, a higher nominal interest rate reduces the equilibrium number of firms but has no steady-state effect on economic growth and firm size because of EMS. Although monetary policy has no long-run growth effect, increasing the nominal interest rate permanently reduces the levels of output, consumption, and employment. Taking transition dynamics into account, we find that welfare is decreasing in the nominal interest rate and the Friedman rule is optimal in this economy.

scholarly journals HUMAN CAPITAL AND INNOVATION IN A MONETARY SCHUMPETERIAN GROWTH MODEL

2017 ◽  
Vol 23 (5) ◽  
pp. 1875-1894 ◽  
Author(s):  
Angus C. Chu ◽  
Lei Ning ◽  
Dongming Zhu
Keyword(s):  
Monetary Policy ◽  
Human Capital ◽  
Interest Rate ◽  
Growth Model ◽  
Growth Rates ◽  
Capital Accumulation ◽  
Nominal Interest Rate ◽  
Human Capital Accumulation ◽  
Schumpeterian Growth ◽  
Long Run

This study explores the growth and welfare effects of monetary policy in a scale-invariant Schumpeterian growth model with endogenous human capital accumulation. We model money demand via a cash-in-advance (CIA) constraint on research and development (R&D) investment. Our results can be summarized as follows. We find that an increase in the nominal interest rate leads to a decrease in R&D and human capital investment, which, in turn, reduces the long-run growth rates of technology and output. This result stands in stark contrast to the case of exogenous human capital accumulation in which the long-run growth rates of technology and output are independent of the nominal interest rate. Simulating the transitional dynamics, we find that the additional long-run growth effect under endogenous human capital accumulation amplifies the welfare effect of monetary policy. Decreasing the nominal interest rate from 10% to 0% leads to a welfare gain that is equivalent to a permanent increase in consumption of 2.82% (2.38%) under endogenous (exogenous) human capital accumulation.

scholarly journals The Effects of Unstable Macroeconomic Indicators on Stock Price Behavior of Banking Sector in the Nigerian Stock Market

2020 ◽  
Vol 11 (2) ◽  
pp. 71-78
Author(s):  
Ibrahim Bello Abdullahi
Keyword(s):  
Interest Rate ◽  
Stock Market ◽  
Stock Price ◽  
Inflation Rate ◽  
Banking Sector ◽  
Positive Influence ◽  
Price Behavior ◽  
Distributed Lag ◽  
Ex Post ◽  
Long Run

The research aimed to investigate the stock price behavior of banking sector in response to unstable macroeconomic variables in the Nigerian stock market. The research employed ex-post facto research design, and the data were subjected to Autoregressive Distributed Lag method of analysis to examine both the short and long run of the studied variables between 2009 and 2018. The findings reveal significant negative effects of interest rate and foreign reserves on the stock price behavior of the banking sector in the long run. Meanwhile, the inflation rate has a significant positive influence on stock price behavior. Then, the exchange rate is not statistically significant in influencing stock price behavior in the Nigerian stock market. It can be concluded that the stock price behavior of banking sector is influenced by foreign external reserve, interest rate, and inflation rate. It is recommended that the monetary policy rate should be reduced to decrease the cost of borrowing and enhance liquidity level in the stock market.

scholarly journals Monetary Policy and Multiple Equilibria

2001 ◽  
Vol 91 (1) ◽  
pp. 167-186 ◽  
Author(s):  
Jess Benhabib ◽  
Stephanie Schmitt-Grohé ◽  
Martín Uribe
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Inflation Rate ◽  
Multiple Equilibria ◽  
Price Level ◽  
Nominal Interest Rate ◽  
Rate Feedback ◽  
Fiscal Regime ◽  
Increasing Function ◽  
The Way

This paper characterizes conditions under which interest-rate feedback rules that set the nominal interest rate as an increasing function of the inflation rate induce aggregate instability by generating multiple equilibria. It shows that these conditions depend not only on the monetary-fiscal regime (as emphasized in the fiscal theory of the price level) but also on the way in which money is assumed to enter preferences and technology. It provides a number of examples in which, contrary to what is commonly believed, active monetary policy gives rise to multiple equilibria and passive monetary policy renders the equilibrium unique. (JEL E52, E31, E63)

scholarly journals ARDL Bounds Testing Approach to Cointegration: A Re-Examination of Augmented Fisher Hypothesis in an Open Economy

2014 ◽  
Vol 2 (2) ◽  
pp. 103-114
Author(s):  
R. Santos Alimi
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Open Economy ◽  
Nominal Interest Rate ◽  
Fisher Effect ◽  
Bounds Testing ◽  
Expected Inflation ◽  
Long Run ◽  
Fisher Hypothesis ◽  
Effective Exchange

This paper investigated the relationship between expected inflation and nominal interest rates in Nigeria and the extent to which the Fisher effect hypothesis holds, for the period 1970-2012. We attempted to advance the field by testing the traditional closed-economy Fisher hypothesis and an augmented Fisher hypothesis by incorporating the foreign interest rate and nominal effective exchange rate variable in the context of a small open developing economy, such as, Nigeria. We applied ARDL bound testing, vector error correction (VECM) and stability of the functions was also tested by CUSUM and CUSUMSQ. We found that full Fisher hypothesis does not hold but there is a Fisher effect in the case of Nigeria over the period under study. In the context of an open economy, the study showed that aside expected inflation, the international variables - foreign interest and nominal effective exchange rates - contain information that predict the nominal interest rate and it also suggested a feed-back mechanism between nominal interest rate and foreign interest rate. Finally, CUSUM test confirms the long-run relationships between the variables and also shows the stability of the coefficients.

scholarly journals AN EMPIRICAL STUDY OF THE FISHER EFFECT AND THE DYNAMIC RELATION BETWEEN NOMINAL INTEREST RATE AND INFLATION IN SINGAPORE

2009 ◽  
Vol 54 (01) ◽  
pp. 75-88 ◽  
Author(s):  
KING FUEI LEE
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Inflation Rate ◽  
Nominal Interest Rate ◽  
Impulse Response Functions ◽  
Fisher Effect ◽  
Dynamic Relationship ◽  
Long Run ◽  
Price Puzzle ◽  
Nominal Interest Rates

The Fisher Effect postulated that real interest rate is constant, and that nominal interest rate and expected inflation move one-for-one together. This paper employs Johansen's method to investigate for the existence of a long-run Fisher effect in the Singapore economy over the period 1976 to 2006, and finds evidence of a positive relationship between nominal interest rate and inflation rate while rejecting the notion of a full Fisher Effect. The dynamic relationship between nominal interest rate and inflation rate is also examined from the error-correction models derived, and the analysis is extended to investigate the impulse response functions of inflation and nominal interest rates where we discover the presence of the Price Puzzle in the Singapore market.

scholarly journals Determinants of small and medium scale enterprises financing by the banking sector in Nigeria: a macroeconomic perspective

2016 ◽  
Vol 13 (1) ◽  
pp. 170-175 ◽  
Author(s):  
Patrick Olufemi Adeyeye ◽  
Bolanle Aminah Azeez ◽  
Olufemi Adewale Aluko
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Commercial Banks ◽  
Inflation Rate ◽  
Banking Sector ◽  
Financial Deepening ◽  
Medium Scale ◽  
Interest Rate Spread ◽  
Lending Rate ◽  
Macroeconomic Indicators

This study assesses from a macroeconomic perspective the determinants of small and medium scale enterprises (SMEs) financing by the banking sector in Nigeria between 1992 and 2014. The empirical model specifies commercial banks’ lending to SMEs as a function of selected macroeconomic indicators which include commercial banks’ total deposits, financial deepening, interest rate spread, lending rate, monetary policy rate, commercial banks’ total assets and inflation rate. The 2SLS estimation results show that only commercial banks’ deposit mobilization, depth of the financial sector and size of the banking sector act as determinants of SMEs financing by commercial banks

Natural disasters and monetary policy: evidence from an augmented Taylor rule

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nicholas Apergis ◽  
James E. Payne
Keyword(s):  
Developing Countries ◽  
Monetary Policy ◽  
Interest Rate ◽  
Natural Disasters ◽  
Natural Disaster ◽  
Taylor Rule ◽  
Nominal Interest Rate ◽  
Policy Response ◽  
Content Type ◽  
Short Run

Purpose The purpose of this paper is to examine the short-run monetary policy response to five different types of natural disasters (geophysical, meteorological, hydrological, climatological and biological) with respect to developed and developing countries, respectively. Design/methodology/approach An augmented Taylor rule monetary policy model is estimated using systems generalized method of moments panel estimation over the period 2000–2018 for a panel of 40 developed and 77 developing countries, respectively. Findings In the case of developed countries, the greatest nominal interest rate response originates from geophysical, meteorological, hydrological and climatological disasters, whereas for developing countries the nominal interest rate response is the greatest for geophysical and meteorological disasters. For both developed and developing countries, the results suggest the monetary authorities will pursue expansionary monetary policies in the short-run to lower nominal interest rates; however, the magnitude of the monetary response varies across the type of natural disaster. Originality/value First, unlike previous studies, which focused on a specific type of natural disaster, this study examines whether the short-run monetary policy response differs across the type of natural disaster. Second, in relation to previous studies, the analysis encompasses a much larger panel data set to include 117 countries differentiated between developed and developing countries.

OPTIMAL MONETARY POLICY FOR THE EMU ACCESSION COUNTRIES. A NEW KEYNESIAN APPROACH

2014 ◽  
Vol 19 (7) ◽  
pp. 1427-1475 ◽  
Author(s):  
Anna Lipińska
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Optimal Policy ◽  
Nominal Exchange Rate ◽  
Nominal Interest Rate ◽  
Output Gap ◽  
Optimal Monetary Policy ◽  
Accession Countries ◽  
Dynamic Stochastic ◽  
Maastricht Criteria

This paper uses a dynamic stochastic general equilibrium model of a two-sector small open economy to analyze how the Maastricht criteria modify a fully credible optimal monetary policy in the Economic and Monetary Union accession countries. We show that if the country is not constrained by the criteria, optimal policy should stabilize fluctuations in PPI inflation, in the aggregate output gap, and in the domestic and international terms of trade. The optimal policy constrained permanently by the Maastricht criteria is characterized by reduced variability of the nominal exchange rate, CPI inflation, and the nominal interest rate and by lower optimal targets for CPI inflation and nominal interest rate. This policy results in higher variability and nonzero means for both PPI inflation and output gap, thus leading to additional, but small, welfare costs compared with the unconstrained policy.

Symmetric and asymmetric adjustment of bank deposit interest rates: empirical evidence from Kenya

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Moses Nzuki Nyangu ◽  
Freshia Wangari Waweru ◽  
Nyankomo Marwa
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Asymmetric Adjustment ◽  
Deposit Rate ◽  
Content Type ◽  
Long Run ◽  
Adjustment Speed ◽  
Short Run ◽  
Pass Through

PurposeThis paper examines the sluggish adjustment of deposit interest rate categories with response to policy rate changes in a developing economy.Design/methodology/approachSymmetric and asymmetric error correction models (ECMs) are employed to test the pass-through effect and adjustment speed of deposit rates when above or below their equilibrium levels.FindingsThe findings reveal an incomplete pass-through effect in both the short run and long run while mixed results of symmetric and asymmetric adjustment speed across the different deposit rate categories are observed. Collusive pricing arrangement behavior is supported by deposit rate categories that adjust more rigidly upwards than downwards, while negative customer reaction behavior is supported by deposit rate categories that adjust more rigidly downwards than upwards.Practical implicationsEven though the findings indicate an aspect of increased responsiveness over the period, the sluggish adjustment of deposit rates imply that monetary policy is still ineffective and not uniform across the different deposit rate categories.Originality/valueTo the best of the authors' knowledge, this is the first study to empirically examine both symmetric and asymmetric adjustment behavior of deposit interest rate categories in Kenya. The findings are key to policy makers as they provide insights on how long it takes to adjust different deposit rate categories to monetary policy decisions. In addition, the behavior of deposit rates partly explains why interest rates capping was imposed in Kenya in 2016.

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