The reason being the pricing of the loan, or interest rate, is subject to the Fisher effect
(Irving Fisher, 1930), arising directly from the so-called Fisher equation, to wit, interestnominal= interestreal + inflation expectations, which is the template for all equations in finance.
Typically, this is explained as arising from the Fisher effect
, named after Irving Fisher, whereby higher inflation increases nominal interest rates through an inflation premium effect.
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.
But every macroeconomist knows about the Fisher effect
, whereby a reduction in the nominal interest rate reduces inflation--in the long run.
This Fisher effect
is well known and is not likely to be disputed in macroeconomic circles.
interest rates affect the multinational corporation through the Fisher Effect
, the International Fisher Effect
, and interest rate parity relationships.
Evidence in some of the empirical studies, mentioned earlier, rejected the strict Fisher effect
, but found less than complete adjustment of nominal interest rate to changes in inflation rates.
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
If the level of inflation increases, interest rates will increase as well (the so-called Fisher effect
), lowering the value of fixed-income assets.
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.
Coach-loads of people are travelling from Wales to the West End once more thanks to the 'Connie Fisher effect
' boosting the popularity of musicals.