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An Empirical Examination of the Fisher Hypothesis in

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  • Ramya Hewarathna

    (School of Economics, La Trobe University)

Abstract

Maintaining a low rate of inflation is very important to achieve sustainable economic growth but is a challenging task for policy makers. Interest rates are one of the main channels through which monetary policy changes can be used to achieve this goal of low inflation. Thus, a significant relationship between interest rates and inflation reveals the effectiveness of monetary policy in controlling inflation. The Fisher hypothesis provides a theoretical basis for this relationship. This hypothesis states the nominal interest rate rises one-for-one with inflationary expectations, maintaining, other things being constant, a constant real interest rate. The aim of this study is to test the Fisher hypothesis in Sri Lanka with the aid of recently introduced econometric tools for the period January 1986 to December 1995, using monthly data. Even though the current inflation rate in Sri Lanka is not as high as in most developing countries, maintaining a low inflation rate receives a high priority in the Sri Lankan Governments policy agenda. The results suggest that Sri Lankan nominal interest rates do not fully adjust to expected inflation which in turn indicates that real variables are not completely insulated from monetary changes. Therefore, changes in monetary instruments do not appear to be completely effective in meeting the goal of low inflation.

Suggested Citation

  • Ramya Hewarathna, 2000. "An Empirical Examination of the Fisher Hypothesis in," Working Papers 2000.03, School of Economics, La Trobe University.
    • Handle: RePEc:trb:wpaper:2000.03
    as

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    References listed on IDEAS

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    4. Param Silvapulle & Ramya Hewarathna, 1997. "A Comparison of Australian Inflation Forecasts," Working Papers 1997.23, School of Economics, La Trobe University.
    5. Gregory, Allan W & Hansen, Bruce E, 1996. "Tests for Cointegration in Models with Regime and Trend Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 555-560, August.
    6. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, vol. 51(1), pages 153-174, January.
    7. repec:bla:ecorec:v:71:y:1995:i:214:p:217-29 is not listed on IDEAS
    8. Param Silvapulle & Ramya Hewarathna, 1997. "A Comparison of Australian Inflation Forecasts," Working Papers 1997.23, School of Economics, La Trobe University.
    9. Param Silvapulle & Brett Inder, 1992. "Does the Fisher Effect Apply in Australia?," Working Papers 1991.02 EDIRC Provider-In, School of Economics, La Trobe University.
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    Cited by:

    1. Navoda Edirisinghe & Selliah Sivarajasingham & John Nigel, 2015. "An Empirical Study of the Fisher Effect and the Dynamic Relationship between Inflation and Interest Rate in Sri Lanka," International Journal of Business and Social Research, LAR Center Press, vol. 5(1), pages 47-62, January.
    2. Navoda Edirisinghe & Selliah Sivarajasingham & John Nigel, 2015. "An Empirical Study of the Fisher Effect and the Dynamic Relationship between Inflation and Interest Rate in Sri Lanka," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 5(1), pages 47-62, January.

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    Macroeconomics; Inflation;

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