On the Fisher Effect and Inflation Dynamics in Low-Income Countries : An Assessment of Sub-Saharan Africa Economies

Controlling for structural breaks, this study examines whether the relationship between the interest rate and inflation exhibits common stochastic trends in a sample of Sub-Saharan Africa (SSA) economies. The results indicate that while the Fisher effect does not hold for the entire sample period, 1980:I-2005:II nor in pre-economic reforms period, this relationship holds for the post-economic reforms (deregulated financial markets and exchange rate float regime) period, 1995:I-2005:II. Further, from the vector error-correction model (VECM), we find a less than proportionate response of short-term adjustment of the nominal interest rate to expected inflation. This implies that, compared to the long-term, in the short-term the nominal interest rate are poor predictors of inflation and the monetary policy in these countries is unlikely to impact on ex ante real interest rates in the long-term