# An Investigation of the Fisher Effect in Zambia

SCHOOL OF HUMANITIES AND SOCIAL SCIENCES

DEPARTMENT OF ECONOMICS

POSTGRADUATE STUDIES

AN INVESTIGATION OF THE FISHER EFFECT IN ZAMBIA (1992-2011)

A Research Proposal for the Dissertation in Partial

Fulfillment of the Requirements of The

Degree of Master of Arts

RESEARCHER:MEBELO MUTEMWA

COMPUTER NO.:531004482

SUPERVISORS:DR. C. NG’ANDWE

DR. C. MPHUKA

DATE:AUGUST, 2012.

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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 CONTENT……………………………………………………………………………………………………………………ii

LIST OF ACRONYMS…………………………………………………………………………………………………………………..iii

1.0Introduction………………………………………………………………………………………………………………………..1 1.1Context of the study……………………………………….……………………………………………….............1 1.2 Statement of the Problem………….....................................................................................2 1.3 Objectives………...............................................................................................................3

1.3.1 General Objective…………………………………………………..........................3

1.3.2 Specific Objectives…………………………………………………………………3

1.4 Statement of Hypothesis…………………………………………………………………………………………….4 1.5 Significance of the Study………………………………….……………………………………….…................4

2.0Literature Review………………………………………………………………………………………………………………5 2.1 Fishers (1930)….…………………………………………………………………………………………………………..5 2.2 Empirical studies in developed countries…………………………………………………………………….6 2.3 Empirical studies in developing countries………………………….…………………………………………9 2.4 Explanations for the deviation from the fisher hypothesis………………………………………….12 3.0Methodology………………………………………………………………………………….………………………………..17 3.1 Data and Variable description ………………………..………………………………………....................17 3.2 Model Specification …………………………………………………...................................................17 3.3 Estimation Procedure………………………………………………………………………………………………….18

3.3.1 Unit Root Test……………………………………………………………………………………………………..19

3.3.2 Bounds Tests for Cointegration……………………………………………………………………………19 4.0Limitations to the study…………………………...……………………………………………………………..……….20

LIST OF ABBREVIATIONS AND ACRONYMS

ADFAUGMENTED DICKEY- FULLER

ARDLAUTOREGRESSIVE DISTRIBUTED LAG

BoZBANK OF ZAMBIA

CPICONSUMER PRICE INDEX

CSOCENTRAL STATISTICAL OFFICE

DFDICKEY- FULLER

DWTDISCRETE WAVELET TRANSFORMATION

ECMERROR CORRECTION MODEL

VECMVECTOR ERROR CORRECTION MODEL

HIPCHIGHLY INDEBTED POOR COUNTRIES

IMFINTERNATIONAL MONETARY FUND

OLSORDINARY LEAST SQUARES

TBTREASURY BILL

CHAPTER ONE

1.0...

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