The Relationship between Inflation Pressure and Interest Rates: An Empirical Analysis of the Fisher Hypothesis in Kenya
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Date
2015
Authors
Laiboni, Gabriel M.
Jagongo, Ambrose
Journal Title
Journal ISSN
Volume Title
Publisher
International Knowledge Sharing Platform
Abstract
The Fisher effects theory holds that there exists a relationship between nominal interest rates and inflation rates:
an increase in the inflation rate should lead to a proportionate increase in the nominal interest rate holding the
real interest rate constant. A market in which this theory is valid is therefore more effective at pricing debt
securities correctly. This paper investigated the bivariate relationship between monthly inflation rates and
monthly yields on 3-Month Treasury bills over the January 2009 to August 2015 period. Both time series were
found to be integrated of order one. Cointegration testing concluded that there was no long run relationship
between interest rates and inflation, and therefore the Fisher effects theory was not valid in Kenya over the study
period. A VAR model was fitted on the data to investigate the lead-lag interactions between the variables and
their lags. Finally, granger causality tests, which concluded bi-directional causality between interest rates and
inflation, were carried out.
Description
A research article published in European Journal of Business and Management
Keywords
Fisher Effects, Inflation, Interest Rates, Cointegration, Vector Autoregression
Citation
European Journal of Business and Management. Vol.7, No.35, 2015