Fisher Effect: An Empirical Re-examination in Case of India
Masudul Adil (),
Shadab Danish (),
Sajad Bhat () and
Bandi Kamaiah ()
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Masudul Adil: Mumbai School of Economics and Public Policy (Autonomous), University of Mumbai
Shadab Danish: University of Hyderabad
Sajad Bhat: University of Hyderabad
Bandi Kamaiah: University of Hyderabad
Economics Bulletin, 2020, vol. 40, issue 1, 262-276
This study examines the Fisher's hypothesis by utilizing the dataset on India's macroeconomic variables with the objective to check whether long-run empirical relationship between the nominal interest rate and inflation expectation exists. To this end, study is conducted on monthly data from Jan-1993 to Mar-2015 by utilizing the autoregressive distributed lag model or bounds testing approach developed by Pesaran, Shin, and Smith (2001). The bounds testing is applied to analyze the co-integration and short-and long-run relationship among variables, for a different combination of the Fisher hypothesis. The present study concludes the existence of a long-run relationship between Treasury bill and expected inflation (estimated by WPI), with a long-run coefficient equal to 0.54, implying partial Fisher effect. While the long-run relationship does not exist between Treasury bill and expected inflation (estimated by CPI). Similarly, long-run relationship although not of one to one in nature, between call money rate and expected inflation (estimated by WPI), is found with a coefficient equal to 0.51; but not for any another combination. The implication of the result shows that the market interest rate is a good indicator of inflationary expectations (i.e. WPI). And the conduct of monetary policy is responsible for favoring the partial Fisher's effect in India.
Keywords: Bounds test; Cointegration; Fisher effect/hypothesis; Rational expectation; India (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ebl:ecbull:eb-19-00590
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