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The relationships between interest rates and inflation changes: An analysis of long-term interest rate dynamics in developing countries


Asgharpur, Hossein and Kohnehshahri, Lotfali Agheli and Karami, Azhdar (2007) The relationships between interest rates and inflation changes: An analysis of long-term interest rate dynamics in developing countries. In: International Economic Conference on Trade and Industry (IECTI) 2007, 3 - 5 December 2007, Bayview Hotel Georgetown, Penang. (Unpublished)

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Abstract

Interest rates lie at the centre of monetary policy, not just as passive reflectors on money supply but rather as one of the main policy instruments. Interest rates have played a central role macroeconomic policy. In developing countries, interest rates have also enjoyed high popularity as policy instruments. For instance, high interest rate has been an essential component of many stabilization programs in countries with chronic inflation during the 1980s. This paper deals with theoretical and empirical aspects of the interactions between interest rates and inflation in developing countries. In the theoretical part reviewing literature revealed that many researchers argue that increasing inflation rate results in increasing interest rate. It is also argued that increasing product costs by increasing interest rate raises product’s prices and consequently inflation. This research examines the causal relationship between the interest rate and inflation rate in a panel of 40 selected Islamic countries using new causality approach and applying panel data methodology over the 2002 – 2005 periods. The results of this study show a unidirectional causality from interest rate to inflation rate in 40 Islamic countries. The findings have practical policy implications for decision makers in the area of macroeconomic planning particularly in Islamic countries. The results imply that banks must reduce interest rate to decrease the inflation.

Item Type: Conference or Workshop Item (Paper)
Additional Information: Organized by Faculty of Economics, Universiti Utara Malaysia
Uncontrolled Keywords: Interest rates, Inflation, Hsiao Causality, Panel Data, Islamic countries
Subjects: H Social Sciences > HB Economic Theory
Divisions: College of Arts and Sciences
Depositing User: Mrs. Juwita Johari
Date Deposited: 21 Feb 2011 12:30
Last Modified: 21 Feb 2011 12:30
URI: http://repo.uum.edu.my/id/eprint/2416

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