THE VALIDITY OF FISHER HYPOTHESIS: EVIDENCE FROM SRI LANKA

T. Udayaseelan, P. Jayasinghe

Abstract


The objective of this paper is to evaluate whether the Fisher Hypothesis holds in the context of Sri Lankan financial markets. Using the Rupee denominated three-month Treasury bill rates from 1978 to 2007 on annual basis, from 1983:1 to 2003:1 on quarterly basis and from 1982:1 to 2006:12 on monthly basis, this paper will employ the instrumental variables method for monthly and quarterly data and cointegration analysis for annual data to investigate the validity of the Fisher Hypothesis in Sri Lanka. Both rational expectations and adaptive expectations approaches are used to obtain a proxy for expected inflation. The study produces no empirical support for even a partial Fisher effect in Sri Lanka during the sample periods concerned under all three data frequencies.

 

Keywords: Fisher Hypothesis; Adaptive Expectations; Rational Expectations; Instrumental Variables; Cointegration

 

For full paper: fmscresearch@sjp.ac.lk


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Faculty of Management Studies & Commerce