FISHER IDENTITY

The Fisher identity (sometimes Fisher effect, from the name of the economist Irving Fisher (1867-1947)) defines the one-for-one adjustment of the nominal interest rate (i) – the amount of money that a unit of initial investment earns – to the expected inflation rate (). 
It derives from the so-called Fisher hypothesis that states, according to the principle of money neutrality, the independence of the real interest rate (r) – the revenue of lent funds after the expected erosion of the purchase power due to the rise in inflation – from the monetary variables. In formulas:                                                                           
                                                                           (1)
An example may clarify the meaning of equation (1).
Let's suppose that a bank posts a nominal interest rate equal to 5 percent per year and that the inflation rate is of 3 percent per year. Then, the real value of the deposits grows of 2 percent per year. 
Figure 1 depicts the changes of the nominal interest rate on the 3-month Treasury Bills (blue line) and the inflation rate measured by the CPI (red line) in the US economy since 1950. The co-movement showed by the two variables provides evidence of the existence of the Fisher effect.



Editor: Lorenzo CARBONARI
© 2009 ASSONEBB