Fisher Effect

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Definition: Fisher Effect

Fisher effect is a principle that states that the real interest rates decrease with the increase in inflation, with the nominal interest rate remaining constant.The fisher effect can be summarized with the equation below:

Real Interest rate = Nominal Interest Rate – Inflation rate

For example, if the nominal rate remains constant at 7%, an increase in inflation from 2% to 3% decreases the real interest rate from 5% to 4%.

The real interest rate determines the real growth rate of investments.

 

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