The Fisher Effect and Its Implications in Emerging and Transitional Economies: Empirical Evidence and Theoretical Insights from Pakistan
DOI:
https://doi.org/10.54938/ijemdss.2026.05.3.722Keywords:
Fisher Effect, Nominal Interest Rates, Expected Inflation, Cointegration, Vector Error Correction Model (VECM), Monetary Policy, Emerging Markets, PakistanAbstract
This study examines the empirical validity and macroeconomic implications of the Fisher effect in emerging and transitional economies, with a specific focus on Pakistan. By analyzing the dynamic relationship between inflation, nominal interest rates, and real interest rates, this paper explores how inflationary pressures alter investor risk perceptions and capital allocation in transitional financial markets. In highly volatile economic environments, rising inflation shifts investor expectations, demanding higher premium returns to offset purchasing power risks. Our conceptual framework demonstrates that failure to properly adjust nominal discount rates to match inflationary trends leads to adverse distortions in investment behavior and broader economic stability. These findings underscore the critical role of the Fisher effect in monetary policy formulation and investment risk management within developing economies.
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Copyright (c) 2026 Rana Shahid Imdad Akash, Aftab Ahmad, Majid Imdad Khan
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