international Fisher effect
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Related to international Fisher effect: Interest rate parity, Covered interest arbitrage
International Fisher effect
International Fisher Effect
international Fisher effecta situation where NOMINAL INTEREST RATES’ differentials between countries reflect anticipated rates of change in the EXCHANGE RATE of their currencies.
For example, if British investors anticipate that the US dollar will appreciate by, say, 5% per annum against sterling, then in order to offset the expected change in parity between the two countries, they would be prepared to accept an interest rate approximately 5% per annum less on a dollar-denominated financial security than that which could be expected on an equivalent investment denominated in sterling. From a borrower's viewpoint, when the international Fisher effect holds, the cost of equivalent loans in alternative currencies will be the same, regardless of the rate of interest.
The International Fisher effect can be contrasted with the domestic Fisher effect, where nominal interest rates reflect the anticipated real rate of interest and the anticipated rate of change in prices (INFLATION). The international equivalent of inflation is therefore changing exchange rates. See COVERED INTEREST ARBITRAGE.