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 ?
When the Fisher effect is applied to the stock returns/inflation relationship, it is suggested that stocks would move one-to-one with inflation, thus making stocks a hedge for inflation.
This Fisher effect is well known and is not likely to be disputed in macroeconomic circles.
The Fisher Effect maintains that the nominal interest rate is a function of the real interest rate and the inflation rate.
Studies by McDonald and Murphy (1989), Mishkin (1992), Wallace and Warner (1993), Phylaktis and Blake (1993), Evans and Lewis (1995), Lee (2007), and Hatemi-J (2009) supported the general view that changes in nominal long-bond interest rates reflect fluctuations in expected inflation, but not to the extent of the full one-to-one Fisher effect.
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.
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.
First, in terms of anticipated component of inflation, we find that the Fisher effect appears to hold at short horizons, where expected inflation has insignificant short-run impacts on real stock returns but not at longer horizons and where anticipated inflation is found to have negative long-run impacts on real stock returns.
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.
Their views are shared by Mankiw [1997], explaining that the Fisher effect did not hold during the late nineteenth and the early twentieth centuries due to the gold standard monetary system.
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.