Fisher Effect

AAA

DEFINITION of 'Fisher Effect'

An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.

INVESTOPEDIA EXPLAINS 'Fisher Effect'

The Fisher effect can be seen each time you go to the bank; the interest rate an investor has on a savings account is really the nominal interest rate. For example, if the nominal interest rate on a savings account is 4% and the expected rate of inflation is 3%, then money in the savings account is really growing at 1%. The smaller the real interest rate the longer it will take for savings deposits to grow substantially when observed from a purchasing power perspective.

RELATED TERMS
  1. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket ...
  2. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise ...
  3. Producer Price Index - PPI

    A family of indexes that measures the average change in selling ...
  4. Reflation

    A fiscal or monetary policy, designed to expand a country's output ...
  5. Deflation

    A general decline in prices, often caused by a reduction in the ...
  6. Retail Prices Index - RPI

    One of the two main measures of consumer inflation produced by ...
Related Articles
  1. Forces Behind Interest Rates
    Economics

    Forces Behind Interest Rates

  2. Eyeing China? Consider These Economic ...
    Economics

    Eyeing China? Consider These Economic ...

  3. What's the lowest year-over-year inflation ...
    Investing Basics

    What's the lowest year-over-year inflation ...

  4. Tips To Beat Inflation For Near-Retireees
    Investing News

    Tips To Beat Inflation For Near-Retireees

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center