...AUGUST, 2012. * ABSTRACT This study seeks to investigate the extent to which the Fisher Hypothesis holds in Zambia. The Fisher hypothesis states that nominal interest rates move one-for-one with expected inflation, leaving the real rate of interest unaffected. Interest rate is an important variable for macroeconomists because it links the economy of today and the economy of the future through its effects on saving and investment decisions. The validity of the Fisher effect also has important implications for monetary policy and needs to be considered by central banks. Despite the importance of the Fisher Hypothesis, very few studies have been carried out in developing countries compared to developed countries. The study will utilize time series data for the period 1992 to 2011, this corresponds to the period in which interest rates were liberalized, and also the period in which Zambia was using monetary targeting as the monetary policy framework. The analysis will use the commercial bank lending rate as proxy measure of nominal interest rates and the Bank of Zambia (BOZ) inflation forecasts will be used as a measure of expected inflation. The Bounds test approach of Pesaran et. al. (2001) will be utilized to analyze the long run relationship between the nominal interest rate and expected inflation rate. * TABLE OF CONTENTS ABSTRACT…………………………………………………………………………………………………………………………………..i TABLE OF...
Words: 8154 - Pages: 33
...alternative interest rates, ceteris paribus. There are several models of money demand used to explain why individuals and businesses hold money balances like cash and checkable deposits. Those models of money demand shows how do the behavior of individuals and businesses causes the fluctuations of money balances in the economy. According to the liquidity preference theory by economist, John Maynard Keynes, he determined that there are three primary motives that people holding money.The first motive is transaction motive which explained that people holding money and used it to buying things. In this motive, money demand depends on size of income, spending habit and slightly affected by interest rate. The second motive for holding money is for precautionary motive which means that people hold money in anticipation of wishing to make huge transactions in the future. People will keep money on hand just in case to overcome unforeseen emergency. The demand of money in order for precautionary motive is depend on size of income, nature of person and farsightedness. The last is speculative motive which people will like to keep money in the liquid form and invested in securities when the interest rate are rises thus it can be said that hold wealth as money to store value. This motive is relies on interest rate, income and expected capital gain. Interest rate is the rate which interest is paid by borrowers for the use of money that they borrow from lender. The equilibrium of interest rate is determined...
Words: 3160 - Pages: 13
...equation by rearranging the equation for real interest rate, which is (r = i - π). Real interest rate equals the nominal interest rate plus inflation. This is a very basic equation. Fisher manipulated it to solve for i, in order to understand the effect that inflation has on nominal interest rate. The famous equation is i = r + π, nominal interest rate equals real interest rate plus inflation. This is basically saying that the nominal interest rate can be changed by a change in either the real interest rate or inflation. The Fisher effect is the one to one relationship between the inflation rate and the nominal interest rate. According to this model, as inflation increases, the nominal interest rate should also increase by the same proportion. The main concept behind the Fisher effect is that higher inflation causes higher nominal interest rate. (Mankiw, 91-92) By using the Fisher effect along with the quantity theory of money, the effect that money growth has on nominal interest rate can also be analyzed. The quantity theory of money is M*V=P*Y or the quantity of money multiplied by the velocity of money equals price multiplied by output. The velocity of money is assumed to remain constant in order to simplify the model. Therefore, PY is determined solely by the quantity of money. PY represents nominal GDP because prices times output is nominal GDP. Y is determined by the factors of production and the production function. Y is also used as real GDP. Because Y is considered exogenous...
Words: 1695 - Pages: 7
...The Research Proposal For The Relationship among Shanghai Commercial Housing Price and Four Variables, Disposable Income, Completed Housing Area, Interest Rate, and Inflation Rate (2007-2010) BY FIN (2) Yang Bohan 0730200084 Tel: 13750016724 Guo Bingyu Liu Yuanjia Xia Jinjing Teng Linyan Li Hui 0730100034 0730100086 0730200079 0730200063 0730200148 Beijing Normal University – Hong Kong Baptist University United International College May 14, 2010 0 Table of Content 1. 2. 3. 4. 6. 7. 8. Title ........................................................................................................................................... 4 Introduction ..............................................................................
Words: 7950 - Pages: 32
...is a precious metal which serves as both financial and real assets. The value of gold in the society goes more than just economic, as it is also treasured as a storage and display of mammon and culture.Of late, the price of gold is not stable in which it tends to oscillatecontingent on the economic condition. In the long-run, its prices keep increasing due to high demand and inadequate supply worldwide. However, in the short-run, its price seems to be volatile due to various potential reasons. Therefore, this study was conducted to determine the factors influencing gold prices in Malaysia. In order to achieve the objective, Stata software was used to assess the prospective relationships between the gold prices as the dependent variable and the inflation rate, interest rate and exchange rate as independent variablesby using Pooled Ordinary Least Squares (POLS) methodology. The monthly data employed in this study spans across a 14 years period from year 2000 until 2013. The results revealed that the rates of inflation, exchange and interest were significantly related with gold prices in Malaysia in different magnitude and direction.It is empirically proven that any change in the rates of these three variables will likely pose a change of gold prices in the country.The results also solidify the importance of gold as a store of wealth and portfolio construction. KEYWORDS:Gold prices, Exchange Rate, Inflation Rate,...
Words: 3969 - Pages: 16
...percentage increase in your real income is: a. 2% b. 3% c. Zero d. 1% 2. The annual inflation rate in an economy dropped from 10% two years ago to 2% last year. Which of the following apply? a. prices of consumer goods dropped by 2% last year, ii) prices of consumer goods uniformly rose at 2% last year, iii) prices of some consumer goods rose by more than 2% and prices for some may have even fallen b. prices of consumer goods uniformly rose at 2% last year c. prices of some consumer goods rose by more than 2% and prices for some may have even fallen 3. [INCOME.1] The CPI in 2008 is 120, while the same measure in 2009 stands at 148. You, a part-time paralegal, earned $ 8,500 a year in 2008, and $ 12,300 a year in 2009. Your real income in 2008, and in 2009 is: a. $7000 and $8300 b. $7803.33 and $8310.81 c. $7083.33 and $8310.81 d. $ 7038 and 8030.31 4. [INCOME.2] Consider question 3 above. The percentage change in your real income between 2008 and 2009 is: a. 17.33% b. 16.55% c. 18.57% 5. [CPI.1] The rate of inflation in the CPI in year 2008 for an economy is 4.17%. The CPI for years 2008 and 2009 for this economy are, respectively, 125 and 133. The inflation rate in the CPI for year 2009 is __. a. 6.4% b. 4.6% c. 5.6% d. 4.5% 6. [CPI.2] Consider question 5 above. The nominal interest rates between 2008 and 2009 a. have risen b. have fallen c. have stayed the same 7. A high and unexpected inflation a. renders the lenders...
Words: 2243 - Pages: 9
...The Relationship Between Exchange Rate and Inflation in Pakistanby Shagufta KashifAbstractThere has been a long-standing interest in studying the factors that are responsible for uneven vacillation in the stable growth of the world economies. Lots and lots of theoretical literature and empirical evidences have addresses this issue in the past. Hike in prices of goods and services and foreign exchange are two important aspects which are deemed responsible for such potholed fluctuations in the economic growthThe volatility of the nature of prices is a major source of concern in all countries since 1970s. The issue is of a more serious nature in the developing countries where inflation in foreign countries known as “imported inflation” is seen to be driving “local/domestic inflation”; making domestic policies to control inflation ineffective. Similarly, in Pakistan, the domestic price level rose from the mid-1970s. The exchange rate started depreciating continuously from the early 1980s. Continuous devaluation of currency and inflation in the 1980s seems to suggest a correlation between the two variables.The studies by Rana and Dowling (1983) suggest that foreign inflation is the most influencing factor in explaining the change in local price level in nine less-developed countries of Asia during the period 1973-79. This study suggests that these countries cannot exercise much control over domestic inflation, however, the policies of their major trading partners (through exchange...
Words: 5793 - Pages: 24
...The Developing Economies, XLI-4 (December 2003): 401–35 401 EFFECTS OF THE REAL EXCHANGE RATE ON OUTPUT AND INFLATION: EVIDENCE FROM TURKEY HAKAN BERUMENT MEHMET PASAOGULLARI This paper assesses the effects of real depreciation on the economic performance of Turkey by considering quarterly data from 1987:I to 2001:III. The empirical evidence suggests that, contrary to classical wisdom, the real depreciations are contractionary, even when external factors like world interest rates, international trade, and capital flows are controlled. Moreover, the results obtained from the analyses indicate that real exchange rate depreciations are inflationary. I. INTRODUCTION interest among academics and policymakers on the controversial issue of exchange rate policies in general and exchange rate regimes and real exchange rates in particular. The effects of financial crises on the global economy are getting more severe, and international trade and capital movements have begun to be central factors in the evolution of such a crisis. Domestic factors that lead to crises in various countries are different, but there are also common features of these crises: big devaluations or depreciations in domestic currency and the subsequent significant output losses of the crisis-hit countries. Turkey has often experienced financial crises in its history. In 1994 and 2001, the nominal domestic currency depreciated 62 per cent and 53 per cent, respectively. This made the effects of large depreciations...
Words: 16182 - Pages: 65
... 2011 and this number is expected to grow further with more and more money flying into Asia from the West due to various economic situations. One area of high growth is in the Islamic debt area. For the purpose of the report, we will be looking into more detail on how certain firm and economic fundamentals affect bond yields (corporate bonds). We chose to focus on several fundamental factors like liquidity, inflation, size of firm and...
Words: 3435 - Pages: 14
... | | |Kamaleshwaran S- EEPSM-04-020 | | |Hena Damodaran - EEPSM -04- 015 | | |Jupudi Venkata Narasimha Rao –EEPSM-04-018 | | |Jaspreet Kaur Rekhi – EEPSM-04-016 | Objective: The objective of this project is to examine, find out the relationship between market structure and performance in the banking (NIC Code 6491) and real estate (RE) (NIC Code 6810) sectors using data from the Commercial Banks and RE firms operating in India before the world financial crisis (started in 2008), during the financial crisis, recovery period and beyond. The project would be beneficial for stakeholders /...
Words: 3448 - Pages: 14
...variables like exchange rate, gross domestic product and inflation using data from 1960-2010 to analyze the results. We have taken the data in percentage form. A great number of empirical studies on the relationships of monetary policy and inflation are available and most of these have analyzed the effectiveness of monetary policy in controlling inflation in Pakistan. In this paper we have presented the effectiveness of monetary policy it’s framework and data estimation through which we reached to the conclusion that monetary shocks do affect real variables like GDP, inflation and exchange rate. Pakistan has been estimated by a number of researchers and it has been recognized that monetary phenomenon are responsible for the high levels of inflation. Keywords: Monetary Policy, Inflation, Exchange rate, Economic Growth, Gross domestic product and Pakistan. Introduction This paper attempts to examine the long-run effects of Monetary Policy on several economic variables such as inflation, economic growth that is gross domestic product and exchange rate in Pakistan. For this purpose, analysis have been employed for the period 1960-2010. As monetary policy actions affect policy variables with a significant gap and with high degree of unpredictability and insecurity, it is key to predict the probable impact and degree of monetary policy actions on the real variables. Usually, policy makers and central banks decide that price stability or low inflation would prompt higher economic...
Words: 2772 - Pages: 12
...Quantity theory of money (QTM) – suggests that the demand for real money balances is proportional to income. Quantity eqn.: MxV=PxT where M – money supply; V – velocity of money: the # of times a PhP bill changes hands for time, t; P – price level; and, T – transactions. 1 13/10/2015 Income (Y) version of the QE: MxV=PxY ◦ where V: the # of times a PhP bill enters someone’s income; ◦ P x Y: nominal GDP. This version of the QTM is used since it is difficult to observe transactions. Money Demand & the Quantity Theory of Money: uses real money balances to measure the purchasing power of the stock of money; the money demand function is like the demand function for a particular good, i.e. the convenience of holding real money balances; 2 13/10/2015 Money demand function below shows that the quantity of real money balances demanded is proportional to real income; M P D kY There is an inverse relationship between V & k: M x V = P x Y if V=1/k This implies that when: (M/P)D is high, k is large, V is small: money changes hands less; OR, (M/P)D is low, k is small, V is large: money changes hands more. 3 13/10/2015 Velocity (V) & the QTM: M x V = P x Y If V, is assumed to be constant, QTM explains what determines nominal GDP; A change in M leads to a change in nominal GDP, thus, if V is fixed, the quantity of money determines...
Words: 870 - Pages: 4
...using Error Correction Model (ECM). The study shows that Long run relationship exists among the variables. Also, the core finding of this study shows that inflation rate, exchange rate and external reserve are significant monetary policy instruments that drive growth in Pakistan. It is therefore recommended that the establishment of primary and secondary government bond markets that can also increase the efficiency of monetary policy and reduce the government’s need to rely on the central bank for direct financing. Keywords: Policy instruments, Economic Growth, GDP, Money supply, monetary policy INTRODUCTION The aim of this study is to examine the impact of monetary policy on economic growth. Economic growth is an important macroeconomic objective for any country. Monetary policy has direct relation with economic growth. Folawewo and Osinubi (2006) stated monetary policy as the arrangements which are planned to control supply of money in a country. In many countries the basic aims of the monetary policy are to stabilize prices, keep the balance of payment equal, promote the employment and increase in economic development. Since the foundation of State Bank of Pakistan (SBP) in 1948 it has playing its role to stabilize economic growth through monetary policy. The main purpose of monetary policy in Pakistan as described in the State Bank of Pakistan Act 1956 is to attain steady growth and control on inflation. In...
Words: 3750 - Pages: 15
...variables 7 Income level 7 Fig: Income receipts of Bangladesh from 2005-2012in US dollar 8 Income payments (US dollar) in Bangladesh 8 Effects of inflation on income 9 Effects of interest rates on income level: 11 Theory of Interest Rate Parity and BDT 12 Theory of Purchasing Power Parity 14 Theory of International Fisher Effect against BDT 16 Regulations on foreign currency transfers/remittances 16 Analysis of investment opportunity for US-based MNC 17 Analysis of Bangladeshi Taka (BDT) against US Dollar ($) Exchange rates play a vital role in a country's level of trade. This is critical to almost every free market-oriented economy in the world. Numerous factors such as inflation, interest rates, current-account/trade balance, public (government) debt and political environment determine exchange rates and all are related to the trading relationship between any two countries. The exchange rate, measured as a number of units of local currency per unit of foreign currency, is the price of the foreign currency in terms of the local currency. Like any other price, the value of the foreign currency in the local market depends on its supply and demand. Like all other countries, the exchange rate management is one of the central issues of macroeconomic policies of Bangladesh. There are four types of exchange rate system- fixed, freely floating, managed float and pegged. Historically,...
Words: 4139 - Pages: 17
...Bond Yields Interest rates have a big part in determining the yield of a bond. If interest rates rise, the bond will be worth less and if they fall bonds will be worth more. The Yield to Maturity or YTM is the rate of return the lender or borrower will earn if the bond is not sold before its maturity. It can be also referred to as the bond`s yield. In order to be able to calculate the Yield to Maturity, some of the things you would need to know are the current price, the par value, the interest payments, and the maturity date for the bond. A coupon is the stated interest payment made on a bond. The market value will be less than par value if the required rate of return is above the coupon interest rate. Bond will be valued above pay value if the required rate of return is below the coupon interest rate. Also, the lower the coupon rate the greater the interest rate risk. Interest rate risk refers to the risk of fluctuating interest rates. In other words, bond values have an inverse relationship to interest rates. Long-term bonds will have a greater interest rate risk than short-term bonds. Interest rates have a greater impact on long-term bonds because it takes longer for them to mature. Typically, the more you can earn from a bond the more risk there is to it. However, the more risk there is to a bond the more likely either the borrower might default. Bonds have a rating system which gives them a rating based on the likelihood...
Words: 1045 - Pages: 5
