ON THE FISHER EFFECT AND INFLATION DYNAMICS IN LOW-INCOME COUNTRIES: AN ASSESSMENT OF SUB-SAHARAN AFRICA ECONOMIES

Boaz Nandwa

Applied Econometrics and International Development, 2006, vol. 6, issue 1

Abstract: Controlling for structural breaks, this study examines whether the relationship between the interest rate and inflation exhibits common stochastic trends in a sample of Sub-Saharan Africa (SSA) economies. The results indicate that while the Fisher effect does not hold for the entire sample period, 1980:I-2005:II nor in pre-economic reforms period, this relationship holds for the post-economic reforms (deregulated financial markets and exchange rate float regime) period, 1995:I-2005:II. Further, from the vector error-correction model (VECM), we find a less than proportionate response of short-term adjustment of the nominal interest rate to expected inflation. This implies that, compared to the long-term, in the short-term the nominal interest rate are poor predictors of inflation and the monetary policy in these countries is unlikely to impact on ex ante real interest rates in the long-term.

Keywords: Monetary policy; the Fisher effect and Sub-Saharan Africa (search for similar items in EconPapers)
JEL-codes: C32 E43 E47 E58 (search for similar items in EconPapers)
Date: 2006
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