Cointegration, Causality and Fisher Effect in Nigeria: An Empirical Analysis (1970-2011)

Abstract

This paper empirically investigates the existence of fisher effect in Nigeria. Specifically, it seeks to: examine the relationship between expected  inflation and nominal interest rate in Nigeria; and also  determine the nature and direction of causality between expected inflation and  nominal interest rate in Nigeria. Employing  Cointegration, Granger causality and error correction techniques and using data spanning the period of 1970-2011, the results indicate the existence of long run partial fisher effect in Nigeria. Specifically, there exists a long run positive and significant relationship between inflation and interest rate in Nigeria. Furthermore, there exists a unidirectional causality running from inflation to interest rate in Nigeria. The paper  recommends amongst others that, given the crucial role of interest rate in determining savings and investment which are necessary for economic growth and development,  policy makers and relevant monetary authorities should employ measures that will prevent inflation rate from rising to alarming heights in order to ensure that interest rates are maintained at reasonably low levels in Nigeria.

Keywords: Cointegration, Causality, Inflation, nominal interest rate Fisher Effect