Exchange rates, interest rates, and inflation rates: Testing the applicability of the International Fisher effect and the Fisher effect in the Philippines

Exchange rates, interest rates, and inflation rates are key economic indicators that are closely monitored due to the critical impact that fluctuations in said factors may cause to the aggregate economy. Several theories have been established to prove the relationships of said indicators, such as the International Fisher effect (IFE), supplemented by a study on the link between the interest rate differential and inflation rate differential, as explained by the Fisher effect (FE). A significant relationship between the IFE and FE variables was set as the hypothesis of this study. In order to test the two theories, monthly data of interest rates, inflation rates, and exchange rates were drawn from the years 1998-2007. Five currencies were selected based on the countries\u27 trading frequency with the Philippines.These are the US dollar, Japanese yen, Singapore dollar, New Taiwan dollar and Hong Kong dollar using the Philippine peso as the home currency for the study. Thsi study employed regression technique to evaluate the data. Upon regression, results showed that there is empirical failure to support long-run IFE for the country pairs under study at the selected time frame. Meanwhile, only Japan and Singapore showed significant results for the Fisher effect. Factors such as the countries\u27 exchange rate are cited as possible reasons for the empirical failure of the IFE. Upon arriving at the insignificant results for both theories, Granger causality was employed to test for causality among the level values of the three economic indicators