The Causal Relationship between Real Interest Rates and Inflation in Central Asian Countries: A Dumitrescu-Hurlin Panel Data Approach

Abstract

This study investigates the causal relationship between real interest rates and inflation in five Central Asian transition economies: Uzbekistan, Kazakhstan, Turkmenistan, Kyrgyzstan, and Tajikistan. While the Fisher Effect traditionally posits a long-run neutrality of real interest rates in response to changes in expected inflation via nominal interest rate adjustments, this study specifically focuses on real interest rates rather than nominal ones. Annual data for the period 2000–2024 were collected from the official databases of the central banks of the respective countries. To explore the direction of causality, the Dumitrescu and Hurlin (2012) Panel Granger Causality test was applied, which allows for cross-sectional dependence and heterogeneity across countries. The empirical findings indicate a unidirectional causality running from inflation to real interest rates. This result implies that inflation significantly shapes interest rate dynamics in these countries, although it does not offer direct validation of the traditional Fisher Hypothesis. The findings contribute to understanding monetary policy behavior in post-socialist economies.