L7_IRP2 - The Fisher Effect Irving Fisher(1930 Real...

Info icon This preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
1 1 Lecture 7: IFP and FRUC The Fisher Effect Irving Fisher (1930): Real interest rates are stable over time. Inflationary expectations cause fluctuations in nominal interest rates. If expectations for future inflation change, the nominal interest rates will also change so that real interest rates remain stable. 2 Lecture 7: IFP and FRUC The Fisher Effect Example: Invest $1 in a real asset (one apple tree): return is liquidated for $1(1+ r )[1+ E ( p )], where r is the real interest rate and E ( p ) is the expected rate of inflation. Invest $1 in a nominal asset: return is liquidated for $1(1+ i ), where i is the nominal interest rate.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon