Fisher Effect Research Articles

Bayesian analysis of dynamic linkages among gold price, stock prices, exchange rate and interest rate in Pakistan

Understanding of complex relationships among economic variables has much significance for investors, researchers and policy makers alike. This study is conducted to examine dynamic linkages among gold price, stock prices, exchange rate and interest rate nexus using monthly data of Pakistan economy ranging from 2001-1 to 2014–12. Search of the best model motivates the use of Bayesian inference. Hence, the study is also used to compare performance of classical VAR model and Bayesian VAR model under four types of priors. It may be considered another significant contribution in terms of methodological framework. All the four variables are nonstationary at level but stationary at first difference. However, no long-run relationship among the variables is found by employing three cointegration tests, i.e. JJ test without considering structural break, GH test considering one unknown structural break and HJ test allowing two unknown structural breaks. Hence short-run relationship is analyzed in the study. Bayesian VAR model under independent normal inverse Wishart priors is selected as the best model which is then used to conduct impulse response analysis. Inverse bilateral relationships between stock prices and gold price as well as between rupee value and gold price are determined where as positive bilateral relationship between stock prices and rupee value is explored. It implies that stock prices and rupee value move downward during recessionary periods but gold becomes more pretty and vice versa also hold. Hence, gold is not only considered as safe haven but it is also considered as an alternative investment during adverse fluctuations in stock and foreign exchange markets of Pakistan. Changes in stock prices and rupee value are negatively responded by monetary policy makers in Pakistan but changes in gold prices are not considered by monetary authorities. Results also reveal that monetary policy actions significantly and adversely affect the three markets under consideration. Direct relationship between nominal interest rate and exchange rate in Pakistan conform to the International fisher effect theory.

The Relationship Threshold Inflation with Fisher Effects in Indonesia: An Investigation Using Bounds Test

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Re-considering the Fisher equation for South Korea in the application of nonlinear and linear ARDL models

This study aims to approach the Fisher effect issue from a different methodological perspective. To this aim, the nonlinear autoregressive distributed lag (ARDL) model, recently developed by Shin et al. (2014), is applied for South Korea between 2000Q4Ƀ2017Q4. This model allows us to decompose one variable (changes in inflation) into two new variables (increases and decreases in inflation) under the manners of nonlinearity and asymmetry. Hence, it enables us to monitor the Fisher effect in terms of increases and decreases separately. We also apply the linear version of the same model since the nonlinear ARDL model is the extended version of linear ARDL model. While the empirical findings of the nonlinear model support asymmetrically partial Fisher effects in the long-run for 1, 3, 5 and 10-years Korean bond rates, the linear model does not. Additionally, the nonlinear model detects lower size partial Fisher effects when the maturity of interest rates gets longer. Another finding of this study is that the nonlinear model may mathematically identify and introduce a different version of the partial Fisher effect based on singular (separate) effects of each decomposed variable in a parametric manner.

Fuzzy logic, parity theories and two currencies valuation for emerging markets with de discount cash flow model

The discount cash flow model must incorporate, in emerging economic systems, a conceptual framework for the inflation and valuation in two currencies treatment. The start point are the parity theories and Fisher effect, adding fuzzy logic for project uncertainty variables: interest rates, inflation, exchange rates and quantities, becoming one of its main contributions. The structure of the paper as follows: they are developed the parity theories and model´s equation at the fuzzy logic framework. Its functioning is illustrated with case of a firm located in an emerging and inflationary economy like Argentina, using spreadsheets. Finally, the results obtained showed the consistency with the parity theories, adding fuzzy logic for the uncertainty treatment, at the comprehensive framework of discounted cash flow model in two currencies.

The Fisher Effect and the Financial Crisis of 2008

This paper uses the Fisher equation relating the nominal interest rate to the real interest rate and expected inflation to provide a deeper explanation of the financial crisis of 2008 and the subsequent recovery than attributing it to the bursting of the housing-price bubble. The paper interprets the Fisher equation as an equilibrium condition in which expected returns from holding real assets and cash are equalized. When inflation expectations decline, the return to holding cash rises relative to holding real assets. If nominal interest rates are above the zero lower bound, equilibrium is easily restored by adjustments in nominal interest rates and asset prices. But at the zero lower bound, nominal interest rates cannot fall, forcing the entire adjustment onto falling asset prices, thereby raising the expected real return from holding assets. Such an adjustment seems to have triggered the financial crisis of 2008, when the Federal Reserve delayed reducing nominal interest rates out of a misplaced fear of inflation in the summer of 2008 when the economy was already contracting rapidly. Using stock market price data and inflation-adjusted US Treasury securities data, the paper finds that, unlike the 2003–2007 period, when stock prices were uncorrelated with expected inflation, from 2008 through at least 2016, stock prices have been consistently and positively correlated with expected inflation.

A Study on the International Fisher Effect : An Investigation from South Korea and China

A Study on the International Fisher Effect : An Investigation from South Korea and China

Pengujian Efek Fisher Internasional: Studi Kasus Indonesia Dan China

The fluctuation of rupiah exchange rate caused by the application of open economy system especially with China in ACFTA international organization, which has good economy and influences in global can draw China as the worthy country in takin the policy through monetary variables. The purpose of this research is to know the short term and long term influence of the differences in Indonesia-China interest, the differences of Indonesia-China inflation, and Yuan exchange rate to rupiah exchange rate based on international fisher effect theory. This research focuses on quantitative analysis by using Error Correction Model (ECM) method. Short term ECM estimation shows that the relation between differences of interest, differences of inflation with rupiah exchange rate is not suitable with international fisher effect theory because is has positive and insignificant relation, yuan exchange rate with rupiah exchange rate is suitable with theory because is has negative. Then, the result of short term ECM estimation shows that there is a gap so the determination of rupiah exchange rate is dominated by Yuan exchange rate. The relation between the difference of interest and the difference of inflation is contrary with the theory and it is only Yuan exchange rate that has the relation with rupiah exchange rate and it is suitable with international fisher effect theory. Keywords: international fisher effect theory, rupiah exchange rate, interest, inflation, error correction model (ECM) analysis

Re-Visiting Fisher Effect for Fragile Five Economies

Abstract In this study, we aim to investigate the relationship between interest rate and inflation rate in the context of the Fisher effect hypothesis for Fragile five economies. In this regard, we employ recently developed panel co-integration and panel causality test methods. The bi-directional causal relation between interest rate and inflation rate exists only in Brazil and Indonesia. On the other hand, there is no causation linkage in India. Results imply that Fisher effect exists only in Brazil and Indonesia.

PENGARUH PARITAS DAYA BELI DAN PARITAS SUKU BUNGA, TERHADAP NILAI TUKAR RUPIAH TERHADAP DOLLAR AMERIKA SERIKAT

The exchange rate will react against change of inflation and interest rate, at least there are three theories that explain the relationship between inflation, interest rate, and exchange rate, namely purchasing power parity, interest rate parity, and international fisher effect. The purpose of this study was to determine the influence of purchasing power parity, interest rate parity, and international fisher effect on the Rupiah exchange rate against US Dollar. The populations in this research included inflation time series data, nominal interest rate, real interest rate, and Rupiah exchange rate. The data used in is secondary data form the inflation report, nominal interest rate, real interest rate, and Rupiah exchange rate quarterly. The independent variable used purchasing power parity, interest rate parity, and international fisher effect,the dependent variable used the Rupiah exchange rate against US Dollar. The result of this study indicated that the purchasing power parity, interest rate parity simultaneously had a significant influence on the exchange rate of Rupiah/US Dollar.

The impact of inflation rate on stock market returns: evidence from Kenya

This study examined the stochastic properties of inflation rate, stock market returns and their cointegrating residuals using monthly data for the period 1993 to 2015. The Autoregressive Fractionally Integrated Moving Average (ARFIMA)-based exact maximum likelihood estimation was employed to determine the integration orders of the individual variables as well as the cointegrating residuals. Results from the ARFIMA model indicate that the month-on-month inflation rate, year-on-year inflation rate and stock market returns have non-integer orders of integration. This is inconsistent with the stationary/nonstationary results often obtained from the conventional unit root tests and implies that any shocks to the variables are highly persistent but eventually disappear. The results also reveal that the cointegrating residuals have non-integer orders of integration, suggesting that deviations from the long run equilibrium are prolonged, contrary to the assumption held under the conventional cointegration framework. The Fractionally Integrated Error Correction Model (FIECM) reveals that the year-on-year inflation rate positively granger causes stock market returns. This supports Fisher Effect and implies that stock market returns in Kenya provide shelter against inflationary pressures. This is the first study to empirically examine fractional cointegration and ARFIMA-based Granger Causality between inflation rate and stock market returns in Kenya.

Investigating the Presence of Fisher Effect for the China Economy

In economic science, Fisher effect is known as the long run relationship between interest rates and inflation rates. According to Fisher, when economy at the full employment, increase in inflation is fully reflects to the nominal interest rates. Fisher equation is used to formulate the relationship between inflation and interest rates. Equation stands out the evidence about money growing, inflation and rates. In this study, the validity of fisher effect for China was tested over the period 1996:01 - 2015:03, the long run relationship between nominal interest rate and inflation rate was examined by using ARDL Bounds Testing Approach which was developed by Peseran et al. Before ARDL, theoretical background of Fisher Effect was explained. Following the literature survey, stationary situations were tested by Augmented Dickey Fuller unit root test. After that Autoregressive-Distributed Lag Bounds Test was applied on variables. According to result of study, the presence of fisher effect in China was supported.

The nexus between microcredit nominal interest rates and inflation in sub-Saharan Africa: evidence from panel vector autoregression analysis

This paper investigates the dynamic effect of microcredit nominal interest rates and inflation, using a panel data of 315 microfinance institutions from 34 sub-Saharan African (SSA) countries over the period 2003 to 2011. To do so, we employ a panel vector autoregression (PVAR) model using efficient generalized method of moments (GMM) estimation as proposed by Blundell and Bond (1998). Apart from the full sample estimation, we further group our countries into three different income groups. Overall, the full sample estimation suggests that there is a negative relationship between inflation and microcredit nominal interest rates. The causality runs from inflation to microcredit nominal interest rates, whereas the reverse does not hold. Furthermore, the forecast error variances after 10 years have very low explanatory power for both microcredit nominal interest rates and inflation. Far more importantly, the significance of our study findings supports the Fisher effect (Fisher, 1930) and that microfinance len...

Examining the Fisher Effect in Short and Long Run: A Study of NSE Sectoral Indices

The belief that stock market provides hedge against inflation has been put to test by many researchers over the past few decades. The present study aims at testing the Fisher effect in the Indian context. We have used monthly data, from July 2006 to June 2016, of the National Stock Exchange sectoral indices and consumer price index. The ordinary least square regression and Johansen cointegration approach have been used to test whether or not Indian sectoral indices provide hedge against inflation in short and long run respectively. The weak exogenity test under VECM has been used to establish the hedge hypothesis in the Indian stock market. The present study has established results in support to the hedge hypothesis that stock market provides hedge against inflation.

Brexit’s Protectionist Policy and Implications for the British Pound

In this paper, we examine the association among the macroeconomic variables - interest rate, inflation rate, unemployment, and the expected spot rate of the British pound with respect to the Euro around the announcement of “Brexit”, June 2016, using the two international parity relationships, Purchase Power Parity (PPP) and International Fisher effect (IFE). We use the two international parity relationships to examine the significance of change in daily interest rates and monthly inflation rates on the change in actual daily spot rates. In addition, we postulate that the protectionist nature of Brexit policy has contributed to lowering U.K. unemployment and prompted wage growth, resulting in higher inflation rates. Our analysis, examining both the magnitude and directional deviation of the actual spot rate compared to the spot rate using the two parity relations, indicate that spot rates predicted based on the PPP and the IFE relations suggest the weakening of the British pound after the Brexit announcement. Furthermore, we find that U.K. unemployment has reduced due to the expanded monetary policy, consistent with the prediction of the Phillip’s curve.

Testowanie hipotezy niezabezpieczonego parytetu stóp procentowych na przykładzie kursów USD/PLN oraz EUR/PLN w latach 2006–2010

Celem artykułu jest weryfikacja hipotezy międzynarodowego efektu Fishera pod kątem możliwości jego wykorzystania w procesie prognozowania kursów walutowych w krótkim czasie. Hipoteza badawcza zakłada występowanie możliwości przeprowadzania zyskownych operacji typu carry trade na polskim rynku pieniężnym w latach 2006–2010 z wykorzystaniem pożyczek w USD i EUR. Podsumowując wyniki testu empirycznego, należy wskazać, że inwestorzy działający na polskim rynku pieniężnym oraz na rynku eurowalutowym mogli osiągać nawet znaczne zyski z operacji carry trade. Warto podkreślić, że decydujący wpływ na decyzje inwestorów miały oczekiwania co do kształtowania się kursów walutowych w przyszłości. Z uwagi na niestabilne kursy walutowe USD/ PLN i EUR/PLN można stwierdzić, że operacje carry trade – w przypadku ich niezabezpieczenia przed ryzykiem walutowym – w dużej mierze stanowiły spekulację walutową. Osiągnięte wyniki pokazują, że międzynarodowy efekt Fishera, którego niespełnienie jest warunkiem koniecznym do przeprowadzenia zyskownych operacji carry trade, nie jest dobrym narzędziem umożliwiającym prognozowanie kursów walutowych w krótkim czasie.

Examining the Fisher effect in short and long run: A study of NSE sectorial Indices

Examining the Fisher effect in short and long run: A study of NSE sectorial Indices

Unit Roots and Structural Breaks

This special issue deals with problems related to unit roots and structural change, and the interplay between the two.[...]

Common Stocks and Inflation: An Empirical Analysis of G7 and BRICS

In an attempt to understand the relationship between stock returns and inflation, this study proposes testing the Fisher effect in two groups of countries, the G7 (Canada, France, Germany, Italy, Japan, United Kingdom and the United States) group of low inflation industrialized countries and the BRICS (Brazil, Russia, India, China, and South Africa) group of relatively high inflation emerging countries, to examine the extent to which a one-to-one movement of stock returns and inflation relates to the country’s inflation rate and consumer price index. By using cointegration and vector error correction models, the results show that there is evidence of a long-run positive relationship in both G7 and BRICS countries.

Inflation and Public Debt Reversals in the G7 Countries

This paper investigates the impact of low or high inflation on the public debt-to-GDP ratio in the G-7 countries. Our simulations suggest that if inflation were to fall to zero for five years, the average net debt-to-GDP ratio would increase by about 5 percentage points during that period. In contrast, raising inflation to 6 percent for the next five years would reduce the average net debtto-GDP ratio by about 11 percentage points under the full Fisher effect and about 14- percentage points under the partial Fisher effect. Thus higher inflation could help reduce the public debt-to-GDP ratio somewhat in advanced economies. However, it could hardly solve the debt problem on its own and would raise significant challenges and risks. First of all, it may be difficult to create higher inflation, as evidenced by Japan’s experience in the last few decades. In addition, an unanchoring of inflation expectations could increase long-term real interest rates, distort resource allocation, reduce economic growth, and hurt the lower–income households.

Evidence of persistence in U.S. short and long-term interest rates

This study examines the time series behavior of U.S. short- and long-run real ex-post interest rates within a long memory approach with non-linear trends using a long span of monthly and annual data. Overall, our results suggest that U.S. real interest rates are not as persistent as suggested in the literature. The implications of this result are relevant to evaluate both the effectiveness of policy interventions and the theoretical implications of different macroeconomic and financial models. For example, our results are consistent with the main implications of the consumption-based asset pricing models and the Fisher effect. Furthermore, the results point out to the difficulties of the monetary policy to influence interest rates, mainly in the long-run, and thus, highlighting varied interest rate policies across short and long-runs when it comes to affecting the real economy.