Inflation Instability Impact on Interest Rate in Egypt: Augmented Fisher Hypothesis Test

Abstract

The paper aims at examining an augmented version of Fisher hypothesis that include inflation instability. According to this hypothesis, there is a positive relation between interest rates and expected inflation. In contrast, there is a debate regarding the impact of inflation uncertainty on interest rate. According to the portfolio theory and models of asset pricing, inflation instability positively affects the interest rate. The reason is that risk-averse investors must be compensated with higher returns for higher risks. In contrast, the loanable funds theory implies a negative impact of inflation instability and interest rates since high uncertainty leads consumers to protect themselves against inflation by raising their savings which lowers consumption and interest rates. To compute inflation volatility, we applied different Autoregressive Conditional Heteroscedasticity models. The simple and augmented versions of Fisher hypothesis are examined using Markov Switch Model to account for possible regime shift in that relationship. For the original Fisher hypothesis, there is an evidence of supporting it in the first regime while that hypothesis does not hold in the second one. In the augmented version of Fisher hypothesis, portfolio theory hypothesis is verified in the first regime whereas the loanable funds hypothesis is confirmed in the second one.

Inflation targeting: A time-frequency causal investigation

“…While Congo, Cambodia, Ghana, Kenya, Nigeria, and Zambia are experiencing a reverse causality i.e., inflation is causing the policy rate with a significant positive correlation except for Congo meaning that an increase in inflation would push the interest rate in the upward direction. These results corroborate the findings in the literature for countries like Nigeria and Kenya [17,39].…”

“…Toda and Yamamoto's Granger causality analysis shows one-way causality from the interest rate to the inflation rate. Amaefula [38] finds strong evidence of unidirectional Granger causality from interest rate to inflation rate for Nigeria using monthly data from 1995 to 2014 whereas Alimi & Ofonyelu [17] employs Toda-Yamamoto test to establish a unidirectional relationship from inflation to nominal interest rate for Nigeria using data for the period 1970-2011 which is in line with the findings for Kenya [39], Jorden [40], Pakistan [15], and Bangladesh [16].…”

“…However, the relationship between inflation and interest rates remains unclear, with studies reporting varying causality directions. Some studies find unidirectional causality from interest rates to inflation [13,14], and inflation to interest rate [15][16][17], while others identify bidirectional relationships [18,19].…”

Model Peramalan Inflasi Bahan Makanan Primer dengan Pendekatan Box-Jenkins: Studi kasus di Kota Palu

“…Inflasi yang tidak stabil dapat memengaruhi kegiatan produksi dan penentuan harga bahan makanan primer. Inflasi yang rendah dan stabil dapat mendukung terpeliharanya daya beli masyarakat (Ahmed & Abdelsalam, 2017;Hedenstierna, 2018). Peramalan tingkat inflasi yang tepat dan akurat diwaktu yang akan datang sangat diperlukan agar para pelaku usaha dapat melakukan perencanaan yang matang dalam melakukan kegiatan bisnis (Arlt & Arltova, 2015;Lidiema, 2017).…”