Fisher effect

Fisher effect

A theory that nominal interest rates in two or more countries should be equal to the required real rate of return to investors plus compensation for the expected amount of inflation in each country.

Fisher Effect

A theory stating that real interest rates are independent of monetary considerations. According to the Fisher effect, a currency's real interest rate is equal to its nominal interest rate less the inflation rate. Thus, if the inflation rate rises, the real interest rate eventually rises as well; likewise, if inflation falls, the real interest rate will fall. See also: International Fisher Effect.

Fisher effect

The direct relationship between inflation and interest rates. Increasing inflationary expectations result in increasing interest rates.

Fisher effect

an expression that formally allows for the effects of INFLATION upon the INTEREST RATE of a LOAN or BOND. The Fisher equation, devised by Irving Fisher (1867–1947), expresses the nominal interest rate on a loan as the sum of the REAL INTEREST RATE and the rate of inflation expected over the duration of the loan:

where R = nominal interest rate, r = real interest rate and F = rate of annual inflation. For example, if inflation is 6% in one year and the real interest rate required by lenders is 4%, then the nominal interest rate will be 10%. The inflation premium of 6% incorporated in the nominal interest rate serves to compensate lenders for the reduced value of the currency loaned when it is returned by borrowers.

The Fisher effect suggests a direct relationship between inflation and nominal interest rates, changes in annual inflation rates leading to matching changes in nominal interest rates. See INTERNATIONAL FISHER EFFECT.

References in periodicals archive ?
There is a market-required real, after-tax yield on all assets in relation to which gold, stocks and bonds are valued that is anchored on long term real per capita productivity growth (a type of heretofore undiscovered Fisher Effect in asset yields).
The Fisher Effect maintains that the nominal interest rate is a function of the real interest rate and the inflation rate.
The International Fisher Effect is based on the Fisher Effect and indicates that a change in the interest rate differential between any two countries will objectively help to predict future movements in the spot exchange rate.
Empirical findings obtained from this approach are abundant but inconclusive thus far; see Cooray (2003) and Johnson (2006) who provide excellent overviews of the theoretical and empirical issues on the Fisher effect.
In this matter, the fact that the ADF-GLS test provides evidence in favor of the Fisher effect for most countries in the sample but the ADF test does not is in accordance with previous discussion in the literature that the ADF-GLS test has more power than the ADF test in detecting stationarity (Ng and Perron, 2001; Rapach and Wohar, 2002).
Here if the interest and inflation variables are nonstationary and have the same level of unit root structure (mostly I(1)), they may co-move together, establishing a long run common trend and in the process uphold the Fisher Effect.
Secondary issues examined include interest-rate changes in the economy overtime and the Fisher Effect.
Even if the Fisher relation does hold, it is unlikely that the Fisher effect will be one-for-one, as implied by defining the real interest rate from the simple Fisher equation.
The International Fisher Effect (IFE) theory is an important concept in the fields of economics and finance that links interest rates, inflation and exchange rates.
Since inflationary expectations influence nominal interest rate, the Fisher effect has far-reaching implications for debtors and creditors as well as for the effectiveness of monetary policy and efficiency in banking sector.
Seigniorage, debasement, the quantity theory of money, the Fisher effect, hyperinflation, the Phillips curve, etc.
Cointegration, Error Correction and the Fisher Effect," Applied Economics, December 1989, 1611-20.