Fisher Effect
Irving Fisher's idea that nominal interest rates move with expected inflation, keeping the real interest…
In plain English
Irving Fisher's idea that nominal interest rates move with expected inflation, keeping the real interest rate roughly steady.
The Fisher effect says a quoted (nominal) interest rate is roughly the real rate plus expected inflation. If inflation is expected to rise by 2 points, nominal rates tend to rise by about 2 points too.
For currencies, it is a reminder that a high interest rate is not automatically attractive. If inflation is just as high, the real return may be small.
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