FISHER HYPOTHESIS–THE ALBANIA CASE

Abstract

The Fisher’s hypothesis is regarded as one of the most important hypothesis in macroeconomics. Fisher (1930) argued that the nominal interest rate consists of an expected ‘real’ rate plus an expected inflation rate and there exist a one-to-one positive relationship between inflation and nominal interest rates in the long run. The objective of this paper is to investigate the relationship between the interest rate and inflation in the long run in the Albanian context. Understanding the relationship between the interest rate and other variables like inflation is important to the study of the financial markets and for the policy making of every country, especially for a developing country as Albania, where no published study to my knowledge exists that has examined this relationship for this country. This paper raises and tries to give answer to two basic questions. First, is the Fisher hypothesis, which postulates a positive relationship between inflation and interest rate valid in the Albanian case? Secondly, if it is, does it hold in its weak or strong form? In order to see if the hypothesis holds for the Albanian case, as in many other countries or not and what is the extent of this relationship, it is used the regression model.