The Effects of Chinese Interest Rates and Inflation: A Decomposition of The Fisher Effect

Bosupeng, Mpho (2016): The Effects of Chinese Interest Rates and Inflation: A Decomposition of The Fisher Effect.

Abstract

China’s economic growth as well as global influence has been escalating in the last decades. The purpose of this investigation is to determine the impact of Chinese interest rates and inflation on other economies. The study uses data from 1982 to 2013 and applies the Toda and Yamamoto approach to Granger causality. Using data for nineteen countries, the results show that China has significant influence on interest rates and inflation dynamics of Costa Rica, Kenya and Nigeria. The study further shows that Japan and South Africa induce China’s interest rates as well as inflation. It is projected that as China’s economy continues to grow, her influence in global financial matters and other economies will also intensify.

• Item Type: MPRA Paper
• Language: English
• Keywords: nominal interest rates, real interest rates, inflation, economic growth
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects

References

Asemota O.M and Bala DA. 2011. ‘A Kalman Filter approach to Fisher Effect: Evidence from Nigeria’. CBN Journal of Applied Statistics, 2:1, 71-91.

Bosupeng M. 2015. ‘The impossible trinity and financial markets - an examination of inflation volatility spillovers’. JCC: The Business and Economics Research Journal, 8:1, 27-42.

Caporale G.M and Pittis N. 1999. ‘Efficient estimation of cointegrating vectors and testing for causality in vector autoregressions’. Journal of Economic Issues, 13, 3-35.

Elliott G. 1998. ‘On the robustness of cointegration methods when regressors almost have a unit root’. Econometrica, 66:1, 149-158.

Engle R.F and Granger C.W. 1987. ‘Cointegration and error correction: representation, estimation, and testing’. Econometrica, 55:2, 251-276.

Fisher I. 1930. ‘The Theory of Interest’. New York: Macmillan.

Granger C.J. 1981. ‘Some properties of time series data and their use in econometric model specification’. Journal of Econometrics, 55, 251-276.

Granger C.W.J. 1969. ‘Investigating causal relations by econometric models: cross spectral methods’. Econometrica, 37:3, 424- 438.

Granger C.W.J and Engle R.F. 1985. Dynamic model specification with equilibrium constraints. University of California, San Diego.

Granger C.W.J and Weiss A.A. 1983. ‘Time series analysis of error correction models’. In Karlim, S.Goodman, L. A. Studies in Economic Time Series and Multivariate Statistics, (Academic Press: New York).

Hasan H. 1999. ‘Fisher effect in Pakistan’. The Pakistan Development Review, 38:2, 153-166.

Hawtrey KM. 1997. ‘The Fisher effect and Australian interest rates’. Applied Financial Economics, 7:4, 337-346.

Hovarth W and Watson M. 1995. ‘Testing for cointegration when some of the cointegrating vectors are prespecified’. Econometric Theory, 11:5, 984-1014.

http://data.worldbank.org/about (Accessed 27 December, 2015)

Incekara A, Demez S, and Ustaoglu M. 2012. ‘Validity of Fisher effect for Turkish economy: cointegration analysis’. Procedia Social and Behavioral Sciences, 58, 396-405.

Jareno F and Tolentino M. 2013. ‘The Fisher effect: a comparative analysis in Europe’. Jokull Journal, 63:12, 201-212.

Johansen S. 1991a. ‘Estimation and hypothesis testing of cointegration vectors in Gaussian Vector Autoregressive models’. Econometrica, 59:6, 1551-1580.

Johansen S. 1988b. ‘Statistical analysis of cointegration vectors’. Journal of Economic Dynamics and Control, 12, 231-254.

Johansen S and Juselius K. 1990. ‘Maximum likelihood estimation and inference on cointegration with applications to the demand for money’. Oxford Bulletin of Economics and Statistics, 52:2, 169-210.

Lanne M. 2001. ‘Near unit and the relationship between inflation and interest rates: a reexamination of the Fisher effect’. Empirical Economics, 26, 357-366.

Mavrotas G and Kelly R. 2001. ‘Old wine in new bottle: testing causality between savings and growth’. The Manchester School Supplement, 97-105.

Olekalns N. 1996. ‘Further evidence of the Fisher effect’. Applied Economics, 28:7, 851-856.

Park J.Y. 1992a. ‘Canonical cointegration regression’. Econometrica, 60, 119-144.

Park J.Y. 1990b. ‘Testing for unit roots and cointegration by variable addition’. Advances in Econometrics, 8, 107-133.

Phillips P.C.B and Durlauf S.N. 1986. ‘Multiple time series regression with integrated processes’. Review of Economic Studies, 53, 473-495.

Phillips P.C.B and Hansen B.E. 1990. ‘Statistical inference in instrumental variable with I(1) processes’. Review of Economic Studies, 57, 99-125.

Phillips P.C.B and Ouilaris S. 1986. ‘Testing for cointegration’. Cowles Foundation Discussion Paper, 809.

Phillips P.C.B and Park J.Y. 1986. ‘Asymptotic equivalence of OLS and GLS in regression with integrated regressors’. Cowles Foundation Discussion Paper, 802.

Phillips P.C.B and Perron P. 1988. ‘Testing for a unit root in time series regression’. Biometrika, 75:2, 335-346.

Rambaldi A.N. 1997. ‘Mutliple time series models and testing for causality and exogeneity: a review’. Working Papers in Econometrics and Applied Statistics, 96. Department of Econometrics, University of New England.

Rambaldi A.N and Doran H.E. 1996. ‘Testing for Granger non-causality in cointegrated systems made easy’. Working Papers in Econometrics and Applied Statistics, 88. Department of Econometrics, University of New England.

Saikkonen P. 1992. ‘Estimation and testing of cointegrated systems by an autoregressive approximation’. Econometric Theory, 8:1, 1-27.

Saikkonen P, and Lu ̈tkepohl H. 2000a. ‘Testing for the cointegrating rank of a VAR process with an intercept’. Economic Theory, 16, 373-406.

Saikkonen P, and Lu ̈tkepohl H. 2000b. ‘Testing for the cointegrating rank of a VAR process with structural shifts’. Journal of Business and Economic Statistics 18, 451-464.

Pelaez R.F. 1995. ‘The Fisher effect: reprise’. Journal of Macroeconomics, 17:2, 333-346.

Stock J.H. 1987. ‘Asymptotic properties of least squares estimates of cointegration vectors’. Econometrica, 55:5, 1035-1056.

Stock J.H, and Watson MW 1987. ‘Testing for common trends’. Working Paper in Econometrics (Hoover Institution, Stanford, CA).

Toda H.Y, and Yamamoto T. 1995. ‘Statistical inference in vector autoregressions with possibly integrated processes’. Journal of Econometrics, 66, 225-250.

Tsong C-C, and Lee C-F. 2013. ‘Quantile cointegration analysis of the Fisher effect’. Journal of Macroeconomics, 35, 186-198.

Wolde-Rufael Y. 2005. ‘Energy demand and economic growth: the African experience’. Journal of Policy Modeling, 27, 891-903.

Zapata H.O, and Rambaldi A.N. 1997. ‘Monte Carlo evidence on cointegration and causation’. Oxford Bulletin of Economics and Statistics, 59, 285-298.