Fisher Effect Calculator
Understanding the Fisher Effect
The Fisher Effect is an economic term defined by Irving Fisher. It states that real interest rate equals nominal interest rate minus inflation.
The direct implication of this law is the relation between inflation and nominal and real interest rates.
- An increase in inflation causes a decrease in the real interest rate unless the nominal interest rate is increased accordingly.
- The positive real interest rate allows for the protection of capital from inflation.
- The negative interest rate does not protect the capital from inflation.
What Is the Fisher Effect?
The Fisher Effect is a tendency of nominal interest rates to follow the changes in inflation. Therefore nominal interest rate adjusts over time to the expected inflation.
Fisher Effect Equation
Ir = In - I
- Ir - Real Interest Rate
- In - Nominal Interest Rate
- I - Expected Inflation
What Is the International Fisher Effect (IFE)?
International Fisher Effect is often confused with Fisher Effect, while it is a different theory that describes the impact of currency exchange rates between countries on nominal interest rates.
The International Fisher Effect claims that changes in nominal interest rates follow the changes in the expected spot exchange rates between the currencies. Therefore the currency of the country with lower nominal interest rates will appreciate against the currency of the country with a higher nominal interest rate since the higher interest rate echoes higher inflation expectations.