Hsiao's Causality Test between Interest Rate and Inflation Rate for Mena Countries Group

Interest as investment opportunity cost or cost of required credits in production process plays an important role in cost of goods manufactured. So it is expected that inflation rate might be affected by changes in interest rate. The present paper studies causality relation between changes in interest rate and inflation rate in countries of Mena. Quarterly data concerning interest and inflation rates were analyzed in 16 member countries in Mena in the period 1997-2008. Augmented Dicki-Foler and Philips structural failure tests were used to assess the reliability of time series data. To determine causality relation between two variables of interest and inflation, Granger and Hsiao's causality tests were utilized. The results obtained from Hsiao's and Granger causality tests indicate that the research hypothesis is supported only for Qatar and Djibouti. In other words, in both countries there is a causality relation from changes in interest rate to changes in inflation rate but there isnt such relation in other countries. Considering the results of research, it can be said that policy of reduced interest rate cant lead us toward the intended goal of controlling inflation rate.