## 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