Empirical Analysis of Fiscal Dominance and the Conduct of Monetary Policy in ...AJHSSR Journal
The study empirically investigates fiscal dominance and the conduct of monetary policy in
Nigeria, using quarterly data from 1986Q1 to 2016Q4. It adopts the vector error correction mechanism (VECM)
and cointegration technique to analyze the data and make inference. The findings reveal that there is no
evidence of fiscal dominance in Nigeria. The empirical results show that budget deficit, domestic debt and
money supply have no significant influence on the average price level. However, budget deficit and domestic
debt are shown to have significant influence on money supply, but only in the short-run. The policy implication
is that the government should enforce fiscal discipline through the appropriate institution and the Central Bank
should be given autonomy to perform the primary function of long-term price stability, among other functions.
Empirical Analysis of Fiscal Dominance and the Conduct of Monetary Policy in ...AJHSSR Journal
The study empirically investigates fiscal dominance and the conduct of monetary policy in
Nigeria, using quarterly data from 1986Q1 to 2016Q4. It adopts the vector error correction mechanism (VECM)
and cointegration technique to analyze the data and make inference. The findings reveal that there is no
evidence of fiscal dominance in Nigeria. The empirical results show that budget deficit, domestic debt and
money supply have no significant influence on the average price level. However, budget deficit and domestic
debt are shown to have significant influence on money supply, but only in the short-run. The policy implication
is that the government should enforce fiscal discipline through the appropriate institution and the Central Bank
should be given autonomy to perform the primary function of long-term price stability, among other functions.
This study examined the nature of the relationship between the macroeconomic variables and share prices using the Nairobi Securities Exchange All Share Index (NASI). The study used four macroeconomic variables namely; interest rate, inflation, exchange rate and gross domestic product (GDP) for the period January 2008 to December 2014. The study found a positive relationship between GDP and NSE share prices. Exchange rate was found to have an insignificant positive relationship with share prices while interest rates had negative relationship with share prices. Inflation rate was found to have significant negative relationship with share prices due to its effect on purchasing power. The study concluded that the four macroeconomic variables combined had strong positive and significant relationship with share prices. The macroeconomic variables accounted for 86.97% of changes in share prices. The study recommended that capital markets regulators and other government regulatory bodies should promote a stable macroeconomic environment in the country for optimal performance of shares and stock market at large.
Macroeconomic stability in the DRC: highlighting the role of exchange rate an...IJRTEMJOURNAL
This study is part of a macroeconomic approach and seeks to identify the role of the rate of
economic growth and the exchange rate in controlling the macroeconomic framework. The approaches adopted
in this paper are part of Keynesian thinking on macroeconomic stability using the macroeconomic stability
index proposed by Burnside and Dollars (2004) and A. Amine (2005). Our results argue that economic growth
is causing macroeconomic stability and that the exchange rate is negatively and significantly accounting for
macroeconomic stability in the Democratic Republic of Congo.
The Effect of Money Supply on InflationHuongHoang70
A study of how money supply affects inflation. The results show that a higher quantity of money supply is not always a cause of inflation.
Multiple linear regression and the GLS method were applied with the use of #Stata software for this research.
However, some additional modifications are needed to improve the model's goodness of fit and more endogenous factors should be added.
Future study might be: Would stimulus packages cause stagflation?
Using a series of econometric techniques, the study analysed interaction between monetary policy and private sector credit in Ghana. This study made use of monthly dataset spanning January 1999 to December 2019 of credit to the private sector (PSC) and broad money supply (M2). The results reveal that there exists cointegration, a long run stationary relation between monetary policy and private sector credit. This implies, increases in credit should prompt long-term increases in monetary policy. It is not surprising that growth in the private sector might have a stronger effect on monetary policy. The Error Correction Test is statistically significant and that all the variables demonstrate similar adjustment speeds. This implies that in the short run, both money supply and credit are somewhat equally responsive to their last period’s equilibrium error. There is unidirectional causation from private sector credit to monetary policy. It can be said that, there is an interaction between money supply and private sector credit. Thus, credit to private sector holds great potential in promoting economic growth. It can be recommended to the government to increase the credit flow to the private sector because of its strategic importance in creating and generating growth of the economy.
This paper studies the causal relationship between inflation and economic growth in Qatar for the period of 1980 to 2016. A time series analysis of unit roots tests, Johansen cointegration method and Granger causality tests were applied on data. The variables were found to be cointegrated, hence a long run-relationship between them exists. Granger causality test found causality runs from inflation to economic growth.
Inflation and Unemployment in Nigeria: An ARDL- ApproachPremier Publishers
This study examines the effect of inflation on unemployment in Nigeria. Unemployment is a major problem in Nigeria, even with the growth rate of 7% within the study period, the problem is still on the increase. The study uses the period 1977 to 2011 in analyzing the long run impact of inflation on unemployment in Nigeria, based on the Phillips curve hypothesis, instead of relying on the traditional ballpark figure made by Nigerians. Real gross domestic product is also used as control variable. The study employed an Autoregressive Distributed Lag (ARDL) Model to test for bounds co-integration, the long run and the Error Correction Adjustment. The co-integration bound test showed that the variables are co-integrated. Our Findings validate the Phillips curve hypothesis as well, contradict the belief by Nigerians about the coexistence of unemployment and inflation in the country.
CAPITAL MARKET DEVELOPMENT AND INFLATION IN NIGERIAAJHSSR Journal
ABSTRACT :This study examined the impact of inflation and capital market development in Nigeria. The
ultimate objective of the study is centered on an empirical investigation of inflation and its impact on the growth
of the Nigerian capital market, and also the trend of inflation and capital market development in Nigeria. In
order to achieve these objectives, the study used tables and graphs to examine the trend of inflation and capital
market development in Nigeria. Augmented Dickey Fuller unit root test was used to check the behavior of data,
and the ARDL bound test was used to check if variables are cointegrated. Post estimation test which includes
the serial correlation, heteroskedasticity and the histogram normality test was also conducted. Data were
collected from secondary sources, such as central bank of Nigeria statistical bulletin and the world development
indicator. The unit root test revealed that the financial sector, financial intermediaries and interest rate were
stationary at levels but exchange rate, inflation, government spending and trade openness became stationary
after the first difference. Empirical findings confirmed that there is a statistically significant long- and short-run
negative effect of inflation on capital market development. On the contrary, economic growth has a statistically
significant long- and short-run positive impact on capital market performance. In addition, results confirmed
that there is positive support of the previous financial sector policies on capital market performance in the
current period.
INFLATION, INTEREST RATE AND EXCHANGE RATE IN NIGERIA: AN EXAMINATION OF THE ...AJHSSR Journal
ABSTRACT: This study examined the linkages among inflation, interest rate and exchange rate along with
money supply and GDP with the aim of showing how the interactions among variables should influence
monetary policy decisions in Nigeria using quarterly data from 2010 to 2018. The relationship among variables
was captured in a Vector Autoregressive (VAR) model. Co integration test was used to examine the long run
relationship among variables and consequently the estimates of a Vector Error Correction (VEC) model was
used to examine the short run relationship among variables. In our findingsexchange rate is indicated as the
most important monetary policy variable because it has a significant link with all variables in the model. The
findings show that price stability and economic growth could be achieve through effective exchange rate and
interest rate policies. It is recommended that the monetary authority should continue to intervene in the foreign
exchange market to stabilize exchange rate because as shown in this study, exchange rate in Nigeria has
significant links with inflation, interest rate, money supply and GDP; and increase in money supply to boost
domestic production by givinglow cost credit to firms that make use of more domestic inputs in production to
ensure that the increase in money supply does not lead to increase in import.
This study examined the relationship between interest rate and economic growth in Nigeria, using secondary time series panel data for the period 1985 – 2014. Data was collected from various issues of the Central Bank of Nigeria Statistical Bulletin and the National Bureau of Statistics. The study employed Augmented Dicker-Fuller (ADF) unit root tests as well as Johansen co-integration test followed by Error Correlation Model (ECM) approach. The ADF unit root test results indicated that the variables are all stationary at first difference. The variables were integrated of order one (1) which implies that the null hypothesis of non-stationary for all the variables of interest is rejected. The Johansen co-integration test result revealed the existence of two co-integrating relationship between the variables at 5% level of significance. The study proceeded to perform the ECM approach and found that interest rate is inversely related to economic growth, but the relationship is statistically insignificant. The recommended that monetary authorities should adopt appropriate polices that would promote and stimulate economic growth in Nigeria.
This study examined the nature of the relationship between the macroeconomic variables and share prices using the Nairobi Securities Exchange All Share Index (NASI). The study used four macroeconomic variables namely; interest rate, inflation, exchange rate and gross domestic product (GDP) for the period January 2008 to December 2014. The study found a positive relationship between GDP and NSE share prices. Exchange rate was found to have an insignificant positive relationship with share prices while interest rates had negative relationship with share prices. Inflation rate was found to have significant negative relationship with share prices due to its effect on purchasing power. The study concluded that the four macroeconomic variables combined had strong positive and significant relationship with share prices. The macroeconomic variables accounted for 86.97% of changes in share prices. The study recommended that capital markets regulators and other government regulatory bodies should promote a stable macroeconomic environment in the country for optimal performance of shares and stock market at large.
Macroeconomic stability in the DRC: highlighting the role of exchange rate an...IJRTEMJOURNAL
This study is part of a macroeconomic approach and seeks to identify the role of the rate of
economic growth and the exchange rate in controlling the macroeconomic framework. The approaches adopted
in this paper are part of Keynesian thinking on macroeconomic stability using the macroeconomic stability
index proposed by Burnside and Dollars (2004) and A. Amine (2005). Our results argue that economic growth
is causing macroeconomic stability and that the exchange rate is negatively and significantly accounting for
macroeconomic stability in the Democratic Republic of Congo.
The Effect of Money Supply on InflationHuongHoang70
A study of how money supply affects inflation. The results show that a higher quantity of money supply is not always a cause of inflation.
Multiple linear regression and the GLS method were applied with the use of #Stata software for this research.
However, some additional modifications are needed to improve the model's goodness of fit and more endogenous factors should be added.
Future study might be: Would stimulus packages cause stagflation?
Using a series of econometric techniques, the study analysed interaction between monetary policy and private sector credit in Ghana. This study made use of monthly dataset spanning January 1999 to December 2019 of credit to the private sector (PSC) and broad money supply (M2). The results reveal that there exists cointegration, a long run stationary relation between monetary policy and private sector credit. This implies, increases in credit should prompt long-term increases in monetary policy. It is not surprising that growth in the private sector might have a stronger effect on monetary policy. The Error Correction Test is statistically significant and that all the variables demonstrate similar adjustment speeds. This implies that in the short run, both money supply and credit are somewhat equally responsive to their last period’s equilibrium error. There is unidirectional causation from private sector credit to monetary policy. It can be said that, there is an interaction between money supply and private sector credit. Thus, credit to private sector holds great potential in promoting economic growth. It can be recommended to the government to increase the credit flow to the private sector because of its strategic importance in creating and generating growth of the economy.
This paper studies the causal relationship between inflation and economic growth in Qatar for the period of 1980 to 2016. A time series analysis of unit roots tests, Johansen cointegration method and Granger causality tests were applied on data. The variables were found to be cointegrated, hence a long run-relationship between them exists. Granger causality test found causality runs from inflation to economic growth.
Inflation and Unemployment in Nigeria: An ARDL- ApproachPremier Publishers
This study examines the effect of inflation on unemployment in Nigeria. Unemployment is a major problem in Nigeria, even with the growth rate of 7% within the study period, the problem is still on the increase. The study uses the period 1977 to 2011 in analyzing the long run impact of inflation on unemployment in Nigeria, based on the Phillips curve hypothesis, instead of relying on the traditional ballpark figure made by Nigerians. Real gross domestic product is also used as control variable. The study employed an Autoregressive Distributed Lag (ARDL) Model to test for bounds co-integration, the long run and the Error Correction Adjustment. The co-integration bound test showed that the variables are co-integrated. Our Findings validate the Phillips curve hypothesis as well, contradict the belief by Nigerians about the coexistence of unemployment and inflation in the country.
CAPITAL MARKET DEVELOPMENT AND INFLATION IN NIGERIAAJHSSR Journal
ABSTRACT :This study examined the impact of inflation and capital market development in Nigeria. The
ultimate objective of the study is centered on an empirical investigation of inflation and its impact on the growth
of the Nigerian capital market, and also the trend of inflation and capital market development in Nigeria. In
order to achieve these objectives, the study used tables and graphs to examine the trend of inflation and capital
market development in Nigeria. Augmented Dickey Fuller unit root test was used to check the behavior of data,
and the ARDL bound test was used to check if variables are cointegrated. Post estimation test which includes
the serial correlation, heteroskedasticity and the histogram normality test was also conducted. Data were
collected from secondary sources, such as central bank of Nigeria statistical bulletin and the world development
indicator. The unit root test revealed that the financial sector, financial intermediaries and interest rate were
stationary at levels but exchange rate, inflation, government spending and trade openness became stationary
after the first difference. Empirical findings confirmed that there is a statistically significant long- and short-run
negative effect of inflation on capital market development. On the contrary, economic growth has a statistically
significant long- and short-run positive impact on capital market performance. In addition, results confirmed
that there is positive support of the previous financial sector policies on capital market performance in the
current period.
INFLATION, INTEREST RATE AND EXCHANGE RATE IN NIGERIA: AN EXAMINATION OF THE ...AJHSSR Journal
ABSTRACT: This study examined the linkages among inflation, interest rate and exchange rate along with
money supply and GDP with the aim of showing how the interactions among variables should influence
monetary policy decisions in Nigeria using quarterly data from 2010 to 2018. The relationship among variables
was captured in a Vector Autoregressive (VAR) model. Co integration test was used to examine the long run
relationship among variables and consequently the estimates of a Vector Error Correction (VEC) model was
used to examine the short run relationship among variables. In our findingsexchange rate is indicated as the
most important monetary policy variable because it has a significant link with all variables in the model. The
findings show that price stability and economic growth could be achieve through effective exchange rate and
interest rate policies. It is recommended that the monetary authority should continue to intervene in the foreign
exchange market to stabilize exchange rate because as shown in this study, exchange rate in Nigeria has
significant links with inflation, interest rate, money supply and GDP; and increase in money supply to boost
domestic production by givinglow cost credit to firms that make use of more domestic inputs in production to
ensure that the increase in money supply does not lead to increase in import.
This study examined the relationship between interest rate and economic growth in Nigeria, using secondary time series panel data for the period 1985 – 2014. Data was collected from various issues of the Central Bank of Nigeria Statistical Bulletin and the National Bureau of Statistics. The study employed Augmented Dicker-Fuller (ADF) unit root tests as well as Johansen co-integration test followed by Error Correlation Model (ECM) approach. The ADF unit root test results indicated that the variables are all stationary at first difference. The variables were integrated of order one (1) which implies that the null hypothesis of non-stationary for all the variables of interest is rejected. The Johansen co-integration test result revealed the existence of two co-integrating relationship between the variables at 5% level of significance. The study proceeded to perform the ECM approach and found that interest rate is inversely related to economic growth, but the relationship is statistically insignificant. The recommended that monetary authorities should adopt appropriate polices that would promote and stimulate economic growth in Nigeria.
This paper analysed the forecasting ability of yield-curve as a predictor of the short-run fluctuations in economic activities in Namibia. The study employed the techniques of unit root, cointegration, impulse response functions and forecast error variance decomposition on the quarterly data covering the period 1996 to 2015. The results revealed a negative relationship between the term structure of interest rates and economic activities, though statistically insignificant. This suggests that the yield-curve has no forecasting ability as a predictor of economic activity in Namibia.
This study examined the effect interest rate on economic growth in Nigeria. Augmented Dickey – Fuller (ADF), Bound Test and Autoregressive Distributed Lag (ARDL) were employed to examine the effect of impact of interest rate on economic growth in Nigeria. The unit root test showed gross domestic product was 1(0) while interest rate, investment and gross capital formation were 1(1). The result of the Bound Test indicated long run relationship among the macroeconomic variables employed in the study. The result of the ARDL indicated that interest rate had negative effect on economic growth both in short run and long run. However, in the long run investment and gross capital formation were established to have positive effect on economic growth with gross capital formation being insignificant. It was concluded that interest rate has a macroeconomic tool is not effective in stimulating economic growth in Nigeria. It was recommended that the level of interest rate should be adequately controlled for the purpose of stimulating economic growth without inflationary pressure. Finally, robust macroeconomic policies aimed at ensuring economic stability should be formulated in order to increase capital formation and attract investment in order to promote economic growth.
The objective of this study is to identify the determinants of inflation in West Africa, mainly in the WAEMU zone, in order to contribute to improving the conduct of monetary policy. The equation of the exchange of the Quantitative Theory of the Currency and the generalized method of moments (MMG) in dynamic panel is used. Annual data concerning six countries in West Africa and range from 1991 to 2015. The results of the estimation show that in addition to the economic growth rate and the money supply, the devaluation has a significant effect on inflation. As we can see, inflation is not systematically a monetary phenomenon in West Africa. The authorities must therefore seek to determine the optimal threshold for the rate of increase of the money supply.
Using time series data, this study investigated the effect of aggregated and disaggregated public spending on economic growth in Nigeria during the period 1980 – 2015. Time series data such as aggregated expenditure proxy by total federal government expenditure (TFGE), disaggregated expenditure proxy by recurrent expenditure (REXP) and capital expenditure (CEXP,) and economic growth proxy by GDP were obtained from central bank of Nigeria (CBN) statistical bulletin. Error Correction Model (ECM) was used to estimate the model. The result of the finding revealed that the total federal government expenditure (TFGE) and capital expenditure (CEXP) exerts positive and significant influences on GDP while recurrent expenditure (REXP) has a positive and insignificant influence on GDP. This implies that the higher the public spending, the higher the GDP. The researchers therefore, recommend that for sustainable Economic Growth (GDP), federal government should increase capital expenditure by allocating more funds to the productive sector of the economy. More so, the positive contributions of public spending to economic growth necessitate the continued use of fiscal policy instruments to pursue macroeconomic objectives in Nigeria.
Abstract: The theoretical relationship of the long-run equilibrium between real exchange rates and interest rate differentials is essentially derived from the Purchasing Power Parity (PPP) and the uncovered interest parity. However, empirical evidence on this long-run relationship has rather been inconclusive. While several authors are able to establish the long-run relationship between real exchange rates and interest rate differentials other could not found this relationship. The reason for lack of relationship in some of the studies is as a result of omitted variables (Meese and Rogoff, 1988). Therefore, attempt is made in this study to evaluate this relationship between real exchange rate and interest rate differential for the case of Nigeria by controlling for foreign exchange reserves. The paper uses monthly data for the period 1993:1-2012:12 and applies Autoregressive Distributed Lags (ARDL) model. The estimates suggest the existence of long-run relationship between real exchange rate, interest rate differential and foreign exchange reserves. In the long run, the exchange rate coefficient has a positive effect on the foreign reserves. However, the effect of interest rate differential is negative and statistically significant. On the short run dynamics, the finding indicates a non-monotonic relationship between real exchange rate, interest rate differential and foreign exchange reserves. The out-of-sample forecast indicates a better forecast using ARMA model as all Theil coefficients are close zero for all the horizons used in the model.
Similar to Cointegration, causality and fisher effect in nigeria (20)
Cointegration, causality and fisher effect in nigeria
1. Research on Humanities and Social Sciences www.iiste.org
ISSN (Paper)2224-5766 ISSN (Online)2225-0484 (Online)
Vol.4, No.24, 2014
98
Cointegration, Causality and Fisher Effect in Nigeria: An
Empirical Analysis (1970-2011)
Uduakobong S. Inam
Department of Economics, Faculty of Social Sciences, University of Uyo, P.M.B 1017, Uyo, Akwa Ibom State,
Nigeria
udysammy@yahoo.com
Abstract
This paper empirically investigates the existence of fisher effect in Nigeria. Specifically, it seeks to: examine the
relationship between expected inflation and nominal interest rate in Nigeria; and also determine the nature and
direction of causality between expected inflation and nominal interest rate in Nigeria. Employing Cointegration,
Granger causality and error correction techniques and using data spanning the period of 1970-2011, the results
indicate the existence of long run partial fisher effect in Nigeria. Specifically, there exists a long run positive and
significant relationship between inflation and interest rate in Nigeria. Furthermore, there exists a unidirectional
causality running from inflation to interest rate in Nigeria. The paper recommends amongst others that, given
the crucial role of interest rate in determining savings and investment which are necessary for economic growth
and development, policy makers and relevant monetary authorities should employ measures that will prevent
inflation rate from rising to alarming heights in order to ensure that interest rates are maintained at reasonably
low levels in Nigeria.
Keywords: Cointegration, Causality, Inflation, nominal interest rate Fisher Effect
1. Introduction
Interest rate and inflation are two important issues that usually occupy dominant and priority positions in the
agenda of policy makers and governments in the global economy. They are two macroeconomic variables whose
behaviour cannot be ignored but monitored, planned and properly guided if the macroeconomic stability of any
society is to be attained. Besides, the economic growth and development of countries all over the world hinges
greatly on the efficient and effective management of certain macroeconomic variables including interest rates
and the general price level. Furthermore, the relationship between the interest rates and inflation is equally of
crucial importance to policy makers and governments.
The Fisher hypothesis (a theory that expresses a relationship between interest rates and inflation), was first
introduced by Irving Fisher, an American economist in 1930. He postulated that the nominal interest rate in any
given period is equal to the sum of the real interest rate and the expected rate of inflation. The Fisher relation
suggests that when expected inflation rises, nominal interest rate will rise with an equal amount leaving the real
rate unaltered (Asemota and Bala, 2011). However, the existence of fisher hypothesis has continued to generate
series of debate among economists (Obi, Nurudeen and Wafure, 2009).
By definition, inflation refers to a sustained rise in the general level of prices (Blanchard, 2009). Inflation is
commonly understood as a situation of substantial and rapid general increase in the level of prices and
consequent deterioration in the value of money over a period of time (Mitthani, 2010). On the other hands,
interest rate is a reward for capital (Ahuja, 2010). There are two concepts of interest rate. Nominal interest rate is
the interest rate that ignores the effects of inflation on the cost of borrowing, while the real interest rate is the
interest rate that is adjusted by subtracting expected changes in the price level (inflation) so that it more
accurately reflects the true cost of borrowing (Mishkin, 2010). In a nutshell, the real interest rate equals the
nominal interest rate minus the expected inflation rate.
Available data on the Nigerian economy reveal that throughout the period 1970 to 2011, interest rate equally
fluctuated actively as inflation rate. For instance interest rate increased from 8 percent in 1970 to peak at 29.80%
in 1992 when inflation rate is 44.81% but however, falls to 20.18% in 1995 when inflation rate is at its peak
point of 72.81%.
It is pertinent to note that real interest rate is an important determinant of saving and investment behaviour of
households and businesses, and therefore crucial in the growth and development of an economy (Duetsche
Bundesbank, 2001). For instance, if interest rate (specifically, lending rate) is high, this will discourage
borrowing which will inadvertently affect businesses thus leading to low output levels. Conversely, high
interest rates (specifically, saving deposit rates), will encourage savings since the holders of surplus funds expect
high returns on their savings.
2. Research on Humanities and Social Sciences www.iiste.org
ISSN (Paper)2224-5766 ISSN (Online)2225-0484 (Online)
Vol.4, No.24, 2014
99
It is also important to note that inflation rate has enormous implications for macroeconomic stability for instance,
high rates of inflation will reduce aggregate demand, production, employment, trade deficits, and balance of
payments. On the other hand, a low and moderate inflation will encourage economic activity, particularly
production. This in turn will raise gross domestic product (GDP), reduce unemployment, and ease the balance of
payments problems (Obi, Nurudeen and Wafure, 2009).
Is there any relationship between inflation and interest rate in Nigeria? Does an increase in expected inflation
lead to a rise in nominal interest rate in Nigeria? Is there any evidence of the existence of the fisher effect in
Nigeria? Is there any causality between expected inflation and nominal interest rate in Nigeria? If yes, what is
the nature and direction of such causality? These and more are the crucial and underlying questions that this
paper seeks to answer. Thus, the major objective of this paper is to investigate the fisher hypothesis in Nigeria
using Cointegration, Granger causality and the Error Correction Mechanisms and using data spanning the period
of 1970-201. Specifically, it seeks to: examine the relationship between expected inflation and nominal interest
rates in Nigeria: and also determine the nature and direction of causality between expected inflation and nominal
nterest rates in Nigeria.
This study is important because, although there exists a vast reservoir of studies on Fishers effect in other
countries, there is a paucity of such studies in Nigeria. Thus, apart, from filling the existing gap in literature,
this study will also serve as a veritable tool in the hands of the Central Bank and other relevant monetary
authorities for efficient, effective and result-oriented policy actions. The paper is divided into five sections,
section 1 is the introduction, and section 2 contains the literature review while section 3 contains the
methodology and the model specification. In section 4, the results are presented and discussed in detail. Section
5 embodies the policy recommendations and conclusion of the paper.
2. Literature Review
2.1 Theoretical Literature Review
The Fisher hypothesis is the theoretical backbone of the relationship between inflation and interest rate. The
Theory states that expected inflation is the main determinant of nominal interest rates (Obi, Nurudeen and
Wafure, 2009). According to Irving Fisher, nominal interest rates consists of two components – the real rate of
interest, to which real saving and investment respond, and a premium based on expected change in the price
level (William & Denis (1969) in Ogbonna (2013)). The real interest rate can be obtained from nominal interest
rate by adjusting for inflation rate that takes place in a year. Thus, the relationship among the real rate of interest,
nominal rate of interest and inflation rate can be stated as below:
r = i - π - - - - - - - - - (1)
Where:
r= interest rate
i = nominal interest rate
π = inflation rate
Rearranging equation (1) we have:
i= r+π - - - - - - - - - - (2)
Equation (2) shows that change in nominal interest rate (i) can occur due to the following reasons: (1) changes in
real interest rate and (2) changes in rate of inflation. The relationship between nominal interest rate, real interest
rate and inflation rate is called Fisher Equation after the economist. Irving Fisher (1867-1947) who first of all
stated this relation (Ahuja, 2010). Since nominal interest rate (i) is the sum of real interest rate (r) and rate of
inflation (π), it therefore follows that a rise in inflation rate will raise the nominal interest rate, while the real
interest rate will remain unchanged. In fact, there is one for one adjustment of nominal interest rate to changes in
inflation rate. The adjustment of nominal interest rate to changes in inflation rate is called Fisher effect (Ahuja
2010).
2.2 Empirical Literature Review
There is a preponderance of empirical studies on Fisher Effect in many countries all over the world. For instance,
Ray (2012) did an empirical testing of international Fisher effect in the United States (US) and selected Asian
counties including India, Korea and Japan by regressing interest rate differential on inflation rate differential
using quarterly data from 2001: Q1 to 2012: Q2. The finding showed the existence of partial fisher effect in the
United States because, although nominal interest rate and inflation where positively related, they do not move
one-to one- as proposed by the Fisher effect hypothesis. Japan, India and Korea however showed no evidence of
Fisher effect.
3. Research on Humanities and Social Sciences www.iiste.org
ISSN (Paper)2224-5766 ISSN (Online)2225-0484 (Online)
Vol.4, No.24, 2014
100
Ito (2009) examined the fisher hypothesis with Japanese long term interest rates using data set spanning from
1970-2007. Employing cointegration technique, the results revealed that all interest rates move together with
expected inflation in the long run equilibrium. This implied that, nominal interest rates in Japan were sensitive to
inflationary expectations.Crowder (2003) investigated Fishers relation for eight industrialized counties including
Germany, Netherlands and Italy using data spanning the period 1960 to 1993. The study made use of nominal
lending rate, nominal interest rate and call money and Treasury bond rate. The results showed evidence of Fisher
effect for Germany, Netherlands and Italy.
Kasman and Turguflu (2005) tested the Fisher hypothesis using a fractional cointegration analysis for 33
countries including Chile. Their results showed that there is a cointegrating relationship between the two
variables for most countries including Chile implying the validity of the fisher hypothesis. Westerlund (2008)
used panel cointegration to test for the existence of fisher effect in 20 OECD (Organization of Economic
Cooperation and Development Countries between 1980 to 2004. The empirical results showed a long-run
relationship between nominal interest rate and inflation. The study concludes that fisher’s effect cannot be
rejected once the panel evidence on cointegration has been taken into account.
Similarly, Toyeshim (2011) did a panel cointegration analysis of the fisher effect for Japan, Britain and U.S from
1990 to 2010. The study confirmed the validity of fishers effect when short run and long-run nominal interest
rate were used although the relationship between nominal interest rate and inflation was seen not to be one-to-
one. Gul and Ekinci (2006) empirically analyzed the relationship between nominal interest rate and inflation
using high frequency data of nominal interest rate and inflation of Turkey. With time series of techniques, the
study provides evidence that long run relationship exist between nominal interest rate and inflation. The
causality test result however, indicates that there is only one directional causality that runs from interest rate to
inflation.
Nkegbe and Mumin (2012) studied inflation an interest rate movements in Ghana with the view to finding out
the trend and possible causal links between them monthly data from 1995 to 2011. Granger causality and
cointegration test were used. The result showed a two-way causality between inflation and nominal interest rate
while the cointegration test also showed that a long run relationship exist between inflation and nominal interest.
On the contrary, empirical studies such as Choudhry (1997), Wesso (2000), Shalishali, (2012) and Sheefeni
(2013) found no evidence of fisher effect existing in diverse countries of interest.
There is a paucity of empirical studies that investigate the Fishers effect in Nigeria. However, the few that exist
have divergent conclusions about the existence of fisher effect in Nigeria. For instance, Alimi and Awomuse
(2012) employed cointegration and error correction techniques to investigate the relationship between expected
inflation and nominal interest rate in Nigeria from 1970 to 2009. The empirical result showed that expected
inflation and nominal interest rate move together but not on a one-to-one basis. The error correction result
showed that about 16% of the disequilibrium between long term and short term interest rate were corrected.
Similarly, Obi, Nurudeen and Wafure(2009) examined the existence of fisher effect in Nigeria usind data
spanning the period 1970-2007. Employing cointegration and error correction techniques, the results revealed the
existence of long run partial fisher effect in Nigeria.
Adegboyega, Odusanya and Popoola (2013) used a Bounds test approach to cointegration to investigate Fishers
effect in Nigeria between the period of 1986-2011. the findings revealed the existence of cointegration amongst
interest rate, inflation and money supply. Furthermore, the results revealed a negative relationship between
interest rate and inflation and a positive relationship between money supply and inflation. With these results,
they inferred a partial fisher effect within the period of study.
Muse and Alimi (2012) tested an augmented Fisher hypothesis for a small open economy using Nigeria as a case
study with a data set that covered 1970 t0 2009 by incorporating foreign interest rate and nominal effective
exchange rate into their model. Employing Granger causality and cointegration tests, the results showed that
expected inflation and nominal interest rate move together but not on a one-to-one basis. The causality test also
shows that causality runs from expected inflation to nominal interest rate as suggested by fisher’s hypothesis.
Nwosa and Oseni (2012) studied the nexus among monetary policy, exchange rate and inflation in Nigeria for
the period spanning from 1986 to 2010. The study employed cointegration and Granger causality test with a
multi-variate vector error correction model (VECM). The study showed that there is a unidirectional causality
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that runs from inflation and exchange rate to interest rate which was used as a measure of monetary policy. The
study, thus suggest a possible operation of fishers effect since inflation granger causes interest rate.
On the contrary, there are some studies that found no evidence of fisher effect in Nigeria. These include:
Amadusu (2012), Asemota and Bala (2011), Chichi and Ogomegbuman (2013), Udoka, Anyingang and Tapang
(2012), and Ogbonna (2013)..
3.0 Methodology
3.1 Model Specification
This study employs a multi-variate cointegration regression analysis in order to find out if there is any long-run
relationship between Interest rate (IR) and Inflation (IFN). This is done in order to avoid spurious correlation and
regression results often encountered in non-stationary time series data. Specifically, this study proposes a
framework based on the Fisher hypothesis which postulates that, when expected inflation rises, nominal interest
rates will also rise on a one-to-one basis. Thus, the researcher specifies a model in which Interest Rate (IR) is
expressed as a function of Inflation (INF) as in equation 3.1.1
IR = F (INF) - - - - - - - - 3.1.1
However, it is absolutely imperative to take cognizance of the fact that there are other factors other than inflation
which exert much influence on Interest rate. Thus, in order that the interest rate model specified for purposes of
this research is not under-specified, other variables such as: Broad Money Supply (MS) and Fiscal Deficits (FD),
are included in the model. Thus, the Interest rate model is specified as:
IR = f (INF, MSt Fdt) - - - - - - - - 3.1.2
More technically written, we have:
IR=bo+b1INF+b2MSt +b3FDt+b4t +µt - - - - - 3.1.3
Where:
IR= Nominal Interest rate (%) (prime lending rate)
INF= Inflation rate (%)
MSt= Growth rate of Money Supply (%)
FDt = Growth rate of Fiscal Deficits (%)
µt = stochastic error term
t = time period
b0 – b3 are parameters of the model representing the coefficients of the explanatory variables.
A Priori Expectations
b1, b2 and b3 >0
3.2. Data
The series employed are annual observations of Interest rate (IR), Inflation rate (INF), Broad Money Supply
(MS) and Fiscal Deficit (FD) for the period 1970-2011. They were sourced from various issues of the Central
Bank of Nigeria (CBN) statistical Bulletin
3.3. Estimation Techniques
The Unit Root test involves testing for the order of integration of each time series (variable) A series is said to
be integrated of order I(1) if it needs to be differenced once to become stationary. The same holds for an I(2)
series which will need to be differenced twice to become stationary. Thus a stationary series is integrated of
order zero I(0) (i.e, no differencing is necessary). Both the Augmented Dickey-Fuller (ADF) (Dickey and Fuller,
1979,1981), and the Philips-Perron (Philip and Perron, 1988) “unit root” tests, are employed to determine the
order of integration of each series.
3.3.2 The Cointegration
This involves testing for the existence or otherwise of co integration between series that have the same order of
integration. The existence of cointegration between series implies the existence of a long- term relationship
between such variables and vice versa. This study employs the maximum likelihood test procedure established
by Johansen and Juselius (1990) and Johansen (1991).
3.3.3 The Error Correction Model
If the existence of Cointegration is established amongst the series, then an Error Correction Mechanism (ECM)
first used by Sargan (1964) and later popularized by Engel and Granger (1969) is constructed to correct for any
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disequilibrium in the short run. In an ECM, the dynamics of both short-run (changes) and long –runs (levels)
adjustment processes are modeled simultaneously, thereby offering the possibility of revealing information about
both the short-run and long-run relationship.
3.3.4 Granger Causality Test
The Granger causality test is used to detect the nature and direction of influence or causality between two
variables. If two variables are co-integrated then the causality of the co-integrated variables are captured in a
vector error correction model (VECM).
4.0 Analysis and Discussion of Results
4.1 Unit Root Tests
Table 4.1a Result of Unit Root Test Based on Augmented Dickey-Fuller (Constant, time and trend included)
Variables ADF statistic 1%
critical level
5%
critical level
10% critical
level
Order of
integration
IR -9.993997 -3.605593 -2.936942 -2.606857 I(1)
INF -6.414470 -3.610453 -2.938987 -2.607932 I(1)
MSt -4.466297 -3.600987 -2.935001 -2.935001 I(0)
FDt -3.863527 -3.600987 --2.935001 -2.605836 I(0)
Source: Computed Result (E-view 5.0)
Table 4.1b Result of Unit Root Test Based on Philip Perron Test (Constant, time and trend included)
Variables ADF statistic 1%
critical level
5%
critical level
10% critical
level
Order of
integration
IR -10.07826 -3.605593 -2.936942 -2.606857 I(1)
INF -10.62075 -3.605593 -2.936942 -2.606857 I(1)
MSt -4.350954 -3.600987 -2.935001 -2.605836 I(0)
FDt -3.973325 -3.600987 -2.935001 -2.605836 I(0)
Source: Computed Result (E-view 5.0)
Notes:
(1) The acronyms for variables are as earlier defined in section 3.1 under model specification
(2) The test was performed with trend and intercept and the critical values of the test are at 1%, 5%, and
10% levels of significance respectively
(3) Order (0) and order (1) indicate stationarity of the various variables at level and at first difference
respectively.
(4) The Ho is that series is non-stationary against alternative hypothesis H1 of a series being stationary. The
rejection of the Ho for the ADF and PP tests are based on the Mckinnon critical values. The lag lengths
were determined in accordance with the Sic.
After comparing the test statistic value against the Mackinnon critical value at 5% level of significance, it was
noticed that two out of the four variables in the two tests employed, that is ADF and PP, were stationary at
levels. The results of both the ADF and PP test show that MSt and FDt were stationary at levels while IR and
INF were stationary at first difference.
4.2 Cointegration Rank Tests
Table 4.2a Unrestricted Cointegration Rank Test (Trace)
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.519723 59.33665 47.85613 0.0029
At most 1 * 0.407326 30.00097 29.79707 0.0474
At most 2 0.161184 9.076536 15.49471 0.3583
At most 3 0.049863 2.045957 3.841466 0.1526
Trace test indicates 2 cointegrating eqn(s) at the 0.05 level
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* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
Table 4.2b Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized Max-Eigen 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**
None * 0.519723 29.33568 27.58434 0.0295
At most 1 0.407326 20.92444 21.13162 0.0534
At most 2 0.161184 7.030580 14.26460 0.4855
At most 3 0.049863 2.045957 3.841466 0.1526
Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
From the table, the trace statistic indicated 2 cointegrating equations at the 5% level of significance while the
maximum Eigen value statistic indicates 1 cointegrating equation at the 5% level of significance. This result
suggests that there is co-integration or long–run relationship between the variables tested.
4.2 Error Correction Model Results
The error correction mechanism for the variables that influence nominal interest rate(IR) was estimated to
capture the dynamics in the Interest rate equation in the short run and to identify the speed of adjustment as a
response to departures from the long run equilibrium. To obtain a parsimonious dynamic ECM for the Interest
rate equation, an initial over-parametised model was estimated which was too difficult to interprete. Thus, it was
reduced and simplified into an interpretable parsimonious model of Interest rate in Nigeria. The result is
presented below.
Table 4.3 Parsimonious Error Correction Result of Factors Influencing Nominal Interest rate.
Dependent Variable: IR
Variable Coefficient Std. Error t-Statistic Prob.
C 16.24477 1.920164 8.460094 0.0000
INF(-1) 0.103617 0.038027 2.724864 0.0099
MST -0.026849 0.038872 -0.690716 0.4942
FDT -0.247078 0.127566 -1.936869 0.0606
ECM(-1) 0.746719 0.116848 6.390500 0.0000
R-squared 0.627331 Mean dependent var 15.06463
Adjusted R-squared 0.585923 S.D. dependent var 6.508518
S.E. of regression 4.188155 Akaike info criterion 5.816247
Sum squared resid 631.4630 Schwarz criterion 6.025219
Log likelihood -114.2331 F-statistic 15.15009
Durbin-Watson stat 2.547503 Prob(F-statistic) 0.000000
The result of the parsimonious model presented in table 4.3 shows a well defined error correction term ECM(-1)
which which is negative and statistically significant at 1% probabaility level. The significance of the coefficient
of the error term supports our earlier positions that the variables under study are indeed cointegrated. The
absolute value of the coefficient of the error term indicates that the disequilibriums in the long run trend of the
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dependent variable (that is interest rate) takes approximately 1/0.75 years (that is 1.3 years) to be corrected back
to the equilibrium level. This coefficient represents the speed of adjustment and it is also consistent with the
hypothesis of convergence towards the long-run equilibrium once the inflation equation fluctuates from its
equilibrium in the short-run. The effect of this ECM is not only large but also has a negative sign as expected
and is significant at 1% probability level. Thus, this validates our earlier position that the variables under study
are indeed cointegrated.
The diagnostic test for the ECM revealed R2
of 0.627331 implying that the specified explanatory time series
explained about 63% of the adjusted total variations in nominal interest rate (IR). The F-statistic of 15.15 is
significant at 1% probability level thus indicating that the R2
is significant and the model has goodness of fit.
The Durbin Watson value of 2.55 however reveals the existence of minor serial correlation.
It is also pertinent to note that, of all the explanatory variables, it is only inflation rate(INF) and Fiscal
Deficit(FDt) that are significant in the parsimonious results presented in table 4.3. The lagged INF is significant
at 1% probability level and is also positive. This indicates that inflation rate has a positive or direct and
significant influence on nominal interest rate in the short run. This implies that an increase in inflation rate will
also lead to an increase in interest rate. This relationship is such that a 1% increase in inflation rate will on the
average lead to a 0.10% increase in interest rate. This reveals that there exists a partial fisher effect in Nigeria as
interest rate and inflation do not move one-to-one. This finding is in conformity with earlier findings by Obi,
Nurudeen and Wafure(2009) and Alimi and Awomuse(2012). FDt is significant at 10% probability level but it
is negative. This indicates that fiscal deficit has a negative or an inverse but significant influence on nominal
interest rate in the short run.
4.4 Granger Causality Results
Table 4.4 Pairwise Granger Causality Test Results
Null Hypothesis: Obs F-Statistic Probability
INF does not Granger Cause IR 40 2.78966 0.07514*
IR does not Granger Cause INF 0.61559 0.54607
MST does not Granger Cause IR 40 1.22402 0.30633
IR does not Granger Cause MST 1.38033 0.26485
FDT does not Granger Cause IR 40 2.88034 0.06950*
IR does not Granger Cause FDT 0.05068 0.95065
From the Granger results, the null hypothesis that inflation rate(INF) does not Granger cause interest rate(IR) is
rejected. This is because computed F- statistic value is significant at 10% probability level. Thus the results show
that inflation granger causes interest rate in Nigeria. This finding conforms to the works of Muse and Alimi
(2012) and Nwosa and Oseni (2012). On the contrary, we accept the null hypothesis that IR does not Granger
cause INF. Thus, unidirectional causality exists between INF and IR with the direction running from INF to IR.
We accept the null hypothesis that the growth rate of real broad money supply (MSt) does not granger cause
interest rate (IR). Similarly, we accept the null hypothesis that IR does not granger cause MSt. Thus, there is no
causality between MSt and IR.
Furthermore, we reject the null hypothesis that FDt does not granger cause IR because computed F- statistic
value is significant at 10% probability level. On the contrary, we accept the null hypothesis that IR does not
granger cause FDt. Thus, unidirectional causality exists between FDt and IR with the causality running from FDt
to IR.
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5. Policy Recommendations and Conclusion
The major focus of this study is to empirically investigate the existence of fisher effect in Nigeria. Specifically
we sought to: examine the relationship between expected inflation and nominal interest rate in Nigeria; and also
determine the nature and direction of causality between expected inflation and nominal interest rate in Nigeria.
Employing Cointegration, Granger causality and error correction techniques and using data spanning the period
of 1970-2011, the results indicate the existence of long run partial fisher effect in Nigeria. Specifically, there
exists a long run positive and significant relationship between inflation and interest rate in Nigeria. Furthermore,
there exists a unidirectional causality running from inflation to interest rate in Nigeria.
From the findings of this study, the policy options can be easily discerned. While there exists a long run
relationship among the variables employed for purposes of this research, policy option requires that, in the short
run, efforts should be aimed at encouraging inflation targeting strategies that will stabilize the general price level
in Nigeria given its significant relationship with interest rate. Specifically policy makers and relevant monetary
authorities should employ measures that will prevent inflation rate from rising to alarming heights in order to
ensure that interest rates are maintained at reasonably low levels. Furthermore, government should ensure that
fiscal deficits are not allowed to be unreasonably high in order to curtail its adverse effects on interest rate.
Finally, given that interest rate plays a crucial role in determining savings and investment which are necessary
for economic growth and development of the nation, it therefore follows that any effort geared towards
maintaining it at economy-friendly levels is a worthwhile attempt and should be treated as a matter of urgent
national importance if the economic growth and development of Nigeria is to be fast-tracked.
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