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Relationship between Inflation and Interest Rate: Evidence from Pakistan

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Author Affiliations

  • 1University of Swat, Khyber Pakhtonkhawa, PAKISTAN
  • 2Economics Department, University of Peshawar, Khyber Pakhtonkhawa, PAKISTAN
  • 3Statistics Department, University of Peshawar, Khyber Pakhtonkhawa, PAKISTAN

Res. J. Recent Sci., Volume 3, Issue (4), Pages 51-55, April,2 (2014)

Abstract

This study focuses on the study of the causal relation of inflation rate with that of nominal interest rate in Pakistan. This is also known as Fisher hypothesis, which is used to study the equilibrium relation for long run between the inflation rate and the nominal interest rate in the time series data from 1973-2010. In this study, the Stationarity and non-Stationarity of the data is checked empirically using both ADF and PP test of unit root. Co-integration techniques like Johansen and Engle-Granger (Residual Based) co-integration test are used to study the long run relationship between the nominal interest rate and inflation. It is found that there exist a long run equilibrium relationship between the nominal interest rate and the inflation of Pakistan for the period of 1973-2010.

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