Table 2-10 gives data on the nominal interest rate (Y) and the inflation rate (X) for the year 1988 for nine industrial countries.
NOMINAL INTEREST RATE (Y) AND INFLATION (X) IN NINE INDUSTRIAL COUNTRIES FOR THE YEAR 1988
a. Plot these data with the interest rate on the vertical axis and the inflation rate on the horizontal axis. What does the scatter gram reveal?
b. Do an OLS regression of Y on X. Present all your calculations.
c. If the real interest rate is to remain constant, what must be the relationship between the nominal interest rate and the inflation rate? That is, what must be the value of the slope coefficient in the regression of Y on X and that of the intercept? Do your results suggest that this is the case? For a theoretical discussion of the relationship among the nominal interest rate, the inflation rate, and the real interest rate, see any textbook on macroeconomics and look up the topic of the Fisher equation, named after the famous American economist, Irving Fisher.