International E-publication: Publish Projects, Dissertation, Theses, Books, Souvenir, Conference Proceeding with ISBN.  International E-Bulletin: Information/News regarding: Academics and Research

Relationship between Inflation and Interest Rate: Evidence from Pakistan

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)


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.


  1. Shah I. and Waleed M., The Fisher Equation, Belgium before and after Euro currency, Thesis, School of Economics and Management, Lund Uni., Sweden (2010)
  2. Fisher I., The Theory of Interest, New York: Macmillan (1930)
  3. Hassan H., Fisher Effect in Pakistan, The Pakistan Deve. Review,38(2), 153—166 (1999)
  4. Berument H. and Mehdi M., The Fisher Hypothesis: a multi-country analysis, J. App. Eco., 34, 1645-1655 (2002)
  5. Jayasinghe P., and Udayaseela T., Does Fisher effect hold in Sri Lanka? An Analysis with bounds testing approach to Cointegration, 76-82 (2010)
  6. Alexander H., The relationship between interest rates and inflation in South Africa: Revisiting Fisher’s hypothesis, Thesis, Rhodes University, South Africa, (2006)
  7. Saeidi P., and Vailan H., Studying the relationship between currency rate, interest rate and inflation rate based on Fisher international theory and Fisher international effect in Iran economy, Aust. J. of Basic and App. Sci. 5(12), 1371-1378, (2011)
  8. Million N., Central Bank’s intervention and the Fisher hypothesis: a threshold cointegration investigation,Economic modelling,21, 1051-1064 (2004)
  9. Macri, J., Fisher Hypothesis: Further Evidence for Australia, Department of Economics, Macquarie University, Sydney, NSW 2109, Australia (2006)
  10. Herwartz et al, Modelling the Fisher hypothesis: worldwide evidence, Econstor available online (2006)
  11. Sundqvist E., An empirical investigation of the international Fisher effect, Bachelor’s Thesis, Lulea University of Technology (2002)
  12. Phylaktis K., and Blake D., The Fisher Hypothesis: Evidence From Three High Inflation Economies, Weltwirtschaftliches Archive 129, 591–599 (1993)
  13. Paleologos J. and Georgantelis S., Does the Fisher Effect apply in Greece? A Cointegration Analysis, Spoudai, University of Piraeus, 48, 1-4 (1996)
  14. Lanne, M., Near Unit Root and the relationship between inflation and interest rate: A reexamination of the Fisher Effect, J. Emp. Eco., 26,357-366 (2001)
  15. Beyer A., and Haug A., Structural Breaks, cointegration and the Fisher Effect. Working paper series No: 1013, European Central Bank Germany (2009)
  16. Westerlund J., Panel cointegration tests of the Fisher ect, J. of App. Eco., 23, 193–233 (2008)
  17. Safdari Mehdi and Ramzan Gholami Avati, Investigating the Asymmetric Effects of Government Spending on Economic Growth, Res.J.Recent Sci.,1(5), 51-58(2012)