Nominal Interest Rate, Inflation Money and Market Link in Bangladesh: An Econometric Analysis

Abstract

This paper pursues to establish a connection among the nominal interest rate, the money market, and the inflation rate in Bangladesh using monthly time series data from June 2005 to March 2019. Because some data are stationary at the level and others are stationary at the 1st difference, the ARDL model is applicable for checking the link. There is a strong positive short-term and long-term relationship between inflation and nominal interest rates, suggesting that Bangladeshi data support the Fisher hypothesis for that time. For this study, the T bill, the call money rate is used as a measure of the money market. The research indicates that regulators should concentrate on call money rates in short-term and T-bill and call money rates in the long-term to control Bangladesh's nominal interest rate.

Inflation targeting: A time-frequency causal investigation

“…Toda and Yamamoto's Granger causality analysis shows one-way causality from the interest rate to the inflation rate. Amaefula [38] finds strong evidence of unidirectional Granger causality from interest rate to inflation rate for Nigeria using monthly data from 1995 to 2014 whereas Alimi & Ofonyelu [17] employs Toda-Yamamoto test to establish a unidirectional relationship from inflation to nominal interest rate for Nigeria using data for the period 1970-2011 which is in line with the findings for Kenya [39], Jorden [40], Pakistan [15], and Bangladesh [16].…”

“…However, the relationship between inflation and interest rates remains unclear, with studies reporting varying causality directions. Some studies find unidirectional causality from interest rates to inflation [13,14], and inflation to interest rate [15][16][17], while others identify bidirectional relationships [18,19].…”