Testing the Fisher Effect in the case of Pakistan and China

Abstract

Interest rate (NIR) and inflation rates (INR) play critical roles in the analysis and implementation of monetary policy (MP), investment assessment. Furthermore, the real interest rate (RIR) is fundamental since it influences the majority of economic consumption, saving, and investment decisions. According to the Fisher's effect (FE) that there are one-to-one link between nominal interest rate and predicted inflation. Therefore, the main aims of the study to investigate the existence of fisher hypothesis in the case of Pakistan and China. Therefore, this study used the data period from 2004 to 2024 in the case of Pakistan and 1987 to 2024 of China and based on the behaviour of the data recommended the use of ARDL techniques for estimations. This study found that in the long run (LR), inflation rate has encouraging and noteworthy effect on interest rate in both countries. Furthermore, in the short run (SR), inflation rate has encouraging but insignificant effect on interest rate in Pakistan, while, encouraging and noteworthy effect on interest rate in China. Therefore, this study concluded that the Fisher-hypothesis (FE) does not exist in the both countries. This study recommended the monetary authorities play their rule in the reducing inflation rate to reduce the interest rate.