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Essay / Research Paper Abstract
This 4 page paper examines the Fisher effect, outlines what it is and hw it has been proved so that the student can undertake their own tests to ascertain the accuracy of the Fisher Effect. The bibliography cites 5 sources.
Page Count:
4 pages (~225 words per page)
File: TS14_TEfisher.rtf
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we will show the student how to do this and provide links to relevant web sites. The Fisher effect is named after Irving Fisher who postulated that in any period
the nominal interest rate will be the sum of the real interest rate and the rate of inflation that was expected (Fisher, 1930). This means that a nominal rate if
interest is two components that create it, the real rate and the inflation rate which he believed had a one to one relationship if there was a world pf perfect
foresight. Therefore, interest rates would not be related to the expected rate of inflation, but a result of the economic factors such as capital productivity (Fisher, 1930). This is
important to understand in the Fisher effect, as if there is a relationship between the real interest rates and the expected inflation rate, as when the real rate changes it
will then not lead to a full adjustment in the nominal rate to the expected inflation rate (Fisher, 1930). If we want to test this theory then we
can replicate the test which have already taken place. Fisher examined the US and the UK economies, for the US the period between 1890 and 1927 was used, and for
the UK the period between 1820 and 1924. The result of this examination was the identification of a lag between inflationary expectations and the change in interest rates (Fisher, 1930).
If the student wishes to bring this up to date data tables exist as http://www.census.gov/statab/www/brief.html, where both inflation and interest rate tables can be found. The interest rates which should
be used are the longer term interest rates. A graph with the figures for both inflation and interest rates between 1969 and 1996 can be found at http://www.economics.unimelb.edu.au/TLdevelopment/econochat/Crosbyecon00.html In Fishers
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