An Empirical Study of the Fisher Effect and the Dynamic Relation between Nominal Interest Rate and Inflation in Singapore

The Singapore Economic Review, 2009

24 Pages Posted: 11 May 2010 Last revised: 6 Jun 2010

See all articles by King Fuei Lee

King Fuei Lee

Schroder Investment Management

Date Written: April 1, 2009

Abstract

The Fisher Effect postulated that real interest rate is constant, and that nominal interest rate and expected inflation move one-for-one together. This paper employs Johansen's method to investigate for the existence of a long-run Fisher effect in the Singapore economy over the period 1976 to 2006, and finds evidence of a positive relationship between nominal interest rate and inflation rate while rejecting the notion of a full Fisher Effect. The dynamic relationship between nominal interest rate and inflation rate is also examined from the error-correction models derived, and the analysis is extended to investigate the impulse response functions of inflation and nominal interest rates where we discover the presence of the Price Puzzle in the Singapore market.

Keywords: Fisher effect, Price Puzzle, Singapore, interest rate, inflation, cointegration, impulse response function

Suggested Citation

Lee, King Fuei, An Empirical Study of the Fisher Effect and the Dynamic Relation between Nominal Interest Rate and Inflation in Singapore (April 1, 2009). The Singapore Economic Review, 2009 , Available at SSRN: https://ssrn.com/abstract=1603723

King Fuei Lee (Contact Author)

Schroder Investment Management ( email )

Singapore

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