Vol 8, No 3 (2020)
An Empirical Assessment of the Systematic Relationship Between Interest Rate and Expected Inflation in Tanzania
Nguling’wa Philip Balele
Abstract
The theorization of the Fischer effect considers expected inflation as the driver of short-term interest rates. However, empirical data does not show a clear support of this theory implying that there are other drivers of interest rates beyond inflation expectations. This paper considers existence of a systematic relationship between the short-term interest rate and expected inflation, specifically investigating whether expected inflation has impact on short term interest rates, other factors held constant. In achieving this objective, econometric methods are applied on Tanzanian data obtained from the Bank of Tanzania. Using OLS and correlation coefficient analyses, the findings indicate existence of a systematic positive relationship between the nominal short-term interest rate and expected inflation, albeit weak with short term interest rates responding to expected inflation. These findings imply that the short-term interest rate, particularly the overnight interbank cash market rate is a potential policy rate for the Bank of Tanzania monetary policy. The findings provide empirical evidence that the intermittent unsystematic relationship between the short-term nominal interest rate and expected inflation are temporary phenomena along the path of nominal interest rate. This justifies the central bank’s transition from the monetary targeting framework to the interest rate-based framework. The study distinguishes itself from the existing literature by initially taking account of the causality between expected inflation and short-term nominal interest rate before estimation of the effect of expected inflation on short term interest rate.
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Keywords
Fisher hypothesis; Fisher equation; Bank of Tanzania.
Publication information
Volume 8, Issue 3
Year of Publication: 2020
ISSN: 1857 - 8721
Publisher: EDNOTERA
How to cite
Balele, N. P.: An Empirical Assessment of the Systematic Relationship Between Interest Rate and Expected Inflation in Tanzania. Journal of Applied Economics and Business, Vol 8, No. 3, 5-19. (2020)