RECENT INVESTIGATIONS OF THE FISHER EFFECT AND THE STABILITY OF THE REAL RATE OF INTEREST

Abstract

The past two decades of economic activity in the U.S. have been characterized by both high inflation and interest rates in comparison to previous periods of stability. The importance of these two variables to our economic welfare and to the effectiveness of economic policy have led to renewed interest in the Fisher Effect. This is the hypothesis put forth by Irving Fisher describing the relationship between these two variables. It usually takes the form R = re + pe + repe (1) in which R is the nominal rate of interest, re is the expected real rate of interest, and pe is the expected rate of change of prices. The term repe is usually considered insignificant and is dropped, giving R = re + pe. (2) Although this equation can be readily quantified on an ex post basis using actual rather than expected values, the fact that expectation of r and p are not directly observable have always made it difficult to derive an ex ante measure of the real rate.

Citation

SMITH, S.S. (1983), "RECENT INVESTIGATIONS OF THE FISHER EFFECT AND THE STABILITY OF THE REAL RATE OF INTEREST", Studies in Economics and Finance, Vol. 7 No. 2, pp. 45-60. https://doi.org/10.1108/eb028639