Fisher effect(redirected from Fisher hypothesis)
Also found in: Wikipedia.
Fisher effectan 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.