An Empirical Analysis of Fisher Effect: “A Case of Pakistan”

This document endeavors to verify the validity of the Fisher Hypothesis (FH) in the case of Pakistan to investigate the long-term relationship between the interest rate and the inflation rate by applying co-integration Granger causation link. Fisher hypothesis has serious implications for the debtor and the lender in an inflation economy at risk because inflation expectations convince the nominal interest rate. Furthermore, the effectiveness of monetary policy and efficiency in the banking sector has been direct in the long-term relationship between the nominal interest rate and the expected inflation rate. The analysis clearly shows the failure of the interest rate as an advance on inflation and as a predictor of inflation. Therefore, the document recommends innovation and financial engineering for a better alternative, especially in the banking sector. The document also recommends growth and support of the stock market compared to the predominant debt market.