Research methods on financial management Essay Example | Topics and Well Written Essays - 2500 words

Research methods on financial management - Essay Example This paper analysis the Fishers hypothesis using data for the UK over the last 20 years, the main aim of this paper is to analyze the relationship between interest rate and inflation, the main aim of this analysis is to show that real interest rate is equal to expected inflation rate plus nominal interest rates, the paper also analysis the underlying theories that depict the relationship between the variables. Interest rates and inflation are important economic variables, high levels inflation in an economy shows that there is something wrong in the economy and policy makers will try and reduce the high inflation rate. However the Fishers model may not hold in the short run given that the policy makers may alter interest rates in the short run, a study by Yuhn (1996) showed that the relationship between interest rate and inflation was stronger over the long run than in the short run. The Fishers hypothesis depicts that nominal interest rates do not depend on monetary policy measures and that there is a positive relationship between nominal interest rate and the expected inflation rate. The Fisher hypothesis model states that real interest rate is equal to nominal interest rate plus expected inflation rate stated as R = I + ÃŽ  e where R is real interest rate, ÃŽ  e is the expected inflation rate and I is nominal interest rate. The Fishers hypothesis model is also stated as I =ÃŽ ± + ÃŽ ²ÃŽ  et where I is nominal interest rate and ÃŽ  et is expected inflation. The value of ÃŽ ² is expected to be positive and a value of ÃŽ ² = 1 shows the strong version of the Fishers hypothesis. The paper analysis the correlation between the variables and help identify whether there is a strong positive relationship between inflation and nominal interest rate, however the correlation coefficient value only shows how two variables move together and this means that there is need to run a regression model that states the