Revisiting the existence of fisher effect in the Nigerian economy
Keywords:
Fisher Effect, Inflation, Nominal Interest Rate, Monetary Policy, NigeriaAbstract
The paper revisits the existence of the Fisher Effect in the Nigerian economy by examining the long-run and short-run relationship between nominal interest rates and inflation over the period from 1981 to 2023. Anchored on the Fisher Hypothesis, which postulates that nominal interest rates adjust one-for-one with expected inflation, the study employs a time-series econometric framework suitable for economies characterized by structural rigidities and evolving monetary regimes. Annual data on lending interest rates and consumer price inflation are utilized, with inflation serving as a proxy for expected inflation due to data limitations. The empirical findings reveal the presence of a stable long-run relationship between nominal interest rates and inflation in Nigeria, indicating that inflationary pressures are eventually incorporated into interest rate movements. However, the adjustment is found to be incomplete, suggesting the existence of a partial Fisher Effect rather than a full one-for-one response. Short-run dynamics further show that nominal interest rates respond slowly to inflationary changes, reflecting policy lags, weak expectation formation, and imperfections in the financial system. The speed of adjustment towards long-run equilibrium is moderate, implying that deviations persist before full correction occurs. The study concludes that while the Fisher Hypothesis holds in principle in Nigeria, its effectiveness is constrained by institutional and structural factors. These findings have important implications for monetary policy, particularly regarding the role of interest rates in inflation control and macroeconomic stabilization. Strengthening policy credibility, deepening financial markets, and improving inflation expectation management are essential for enhancing the operation of the Fisher Effect in the Nigerian economy.Downloads
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