Interest Rate Determination in Small Developing Countries

Lorde, Troy and Francis, Brian and Waithe, Kimberly and Taylor, Timothy (2008): Interest Rate Determination in Small Developing Countries. Published in: Savings and Development , Vol. 32, No. 1 (2008): pp. 31-50.

Abstract

This paper investigates the validity of Fisher’s hypothesis in determining nominal interest rates for five small developing countries—The Bahamas, Barbados, Guyana, Jamaica, and Trinidad and Tobago. We augment the traditional Fisher test equation by introducing the US nominal interest rate. Results indicate that there is a long run relationship for The Bahamas and Trinidad and Tobago; and for Jamaica during the period when the country is under a floating exchange regime. The nominal interest rate in each of the latter countries is positively related to the US nominal rate. Specifically, in The Bahamas the relationship is one-for-one, and for the others it is greater than one-for-one. Expected inflation only has an effect in Jamaica and Trinidad and Tobago, although the relationship is negative in the case of the latter. Fisher’s hypothesis, even in its augmented form, does not appear to be a suitable framework for determination of nominal interest rates for Barbados and Guyana.

• Item Type: MPRA Paper
• Language: English
• Keywords: interest rates; developing countries; Fisher’s hypothesis, monetary policy
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O54 - Latin America ; Caribbean

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