Abubakar Ghaffari, Atta UR Rehman


Interest rate today is the most frequently used tool of monetarypolicy. Mainstream economists think that by increasing the interestrate, inflation can be reduced, and this provides the basis ofcontemporary monetary policy. However there is evidence againstthis theory. In this study, use the data of large number of Islamic andnon-Islamic countries. We apply sophisticated econometric techniquesincluding Granger Causality and VECM to explore the relationshipbetween interest rate and prices. We find that the relationship betweenthe two variables is positive but insignificant, showing the failure ofinterest rate as a monetary policy tool.


Cost channel, monetary transmission mechanism, monetary policy

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