Nominal interest rates and inflation in the Pacific‐Basin countries

Abstract

Vector‐autoregression (VAR), integration, and cointegration models are used to investigate the causal relations, dynamic interaction, and a common trend between interest rates and inflation in nine countries in the Pacific‐Basin. This paper finds that for all countries, short‐ and long‐term interest rates and the spread between the long‐term interest rates and inflation are non‐stationary I (1) processes. The nominal interest rates and inflation are not co‐integrated. In addition to this study’s inability to find a unidirectional causality between inflation and interest rates, when the VAR model is used, it also fails to find a consistent positive response either of inflation to shocks in interest rates or of interest rates to shocks in inflation in most of the countries studied. The VAR model results are consistent with the cointegration tests’ results, that is, nominal interest rates are poor predictors for future inflation in the Pacific‐Basin countries.

Citation

Al‐Khazali, O. (1999), "Nominal interest rates and inflation in the Pacific‐Basin countries", Management Decision, Vol. 37 No. 6, pp. 491-498. https://doi.org/10.1108/00251749910277989