The relationship between interest rates and inflation in South Africa: revisiting Fisher's hypothesis
The analysis uses the 3-month bankers’ acceptance rate and the 10-year government bond rate to proxy both short- and long-term interest rates. The existence of a long-run unit proportional relationship between nominal interest rates and expected inflation is tested using Johansen’s cointegration test. The data is analysed for the period April 2000 to July 2005 as the research aims to establish whether the Fisher relationship holds within an inflation targeting monetary policy framework.
The short-run Fisher effect is not empirically verified. This is due to the effects of the monetary policy transmission mechanism and implies that short-term nominal interest rates are a good indication of the stance of monetary policy. A long-run cointegrating relationship is established between long-term interest rates and expected inflation. The long-run adjustment is less than unity, which can be attributed to the credibility of the inflation-targeting framework.
School Location:South Africa
Source Type:Master's Thesis
Keywords:economics and economic history
Date of Publication:01/01/2007