| dc.description.abstract | This thesis investigates the relationship between expected inflation and nominal
interest rates in Kenya and the extent to which the Fisher effect hypothesis holds. The
hypothesis, proposed by Fisher (1930), which stipulates that the nominal rate of
interest reflect movements in the expected rate of inflation has been the subject of
much empirical research in many industrialised countries. This wealth of literature
can be attributed to various factors including the pivotal role that the nominal rate of
interest and, perhaps more importantly, the real rate of interest plays in the economy.
Secondary data was collected from the published reports for the period of thirteen
years between 1999-2011.
Regression analysis was used in this in this study because it is widely used for
prediction and forecasting. The study derived the nominal interest rate from the T bill
rate, inflation rate from CPI and finally the actual real rate from GDP. Computed Real
interest rates and actual Real interest rates were compared over a period of 13 years
(1999 to 2011) to determine if the fisher hypothesis holds in Kenyan Economy.
The findings and analysis support to the existence of partial fisher effect in Kenya
because both interest rates and inflation rate do not move with one on-one over the
period under study. The average of interest rate obtained from expected rate of
interest on facilities has a long run relationship with inflation rate, but as the results
showed, this relation is very weak, and it can be ignored. The most likely explanation
for this weak relationship is because expected rate of interest on facilities are not
formed by market forces, but are artificially determined by monetary authorities as
part of the monetary policy framework. | en |
