International Fisher Effect

International Fisher effect

States that the interest rate differential between two countries should be an unbiased predictor of the future change in the spot rate.

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International Fisher Effect

In international finance, a theory stating that an expected change in the exchange rate between two currencies is roughly equivalent to the difference between their nominal interest rates. This is based on the Fisher hypothesis, which states that real interest rates are independent of monetary considerations. If this is true, then a state with a low nominal interest rate has a low inflation rate; likewise, a country with a high nominal interest rate has a higher inflation rate. The real value of the high interest rate country will depreciate over time, leading to a circumstance in which its exchange rate, vis a vis the low interest rate country, will change approximately according to the difference between their interest rates. This theory is controversial because, in practice, currencies with higher nominal interest rates tend to have lower inflation than currencies with lower interest rates.