**📅 Date:** ➤ ⌈[[2025-02-10-Mon〚GLP1 ▪ Fisher Effect & IFE ▪ Money Multiplier 〛]] ⌋ **💭 Note:** ➤ ==r = i - π== ➤ Relationship between nominal interest rates, real interest rates, and inflation ➤Investors demand higher nominal interest rates, Borrowers prefer a lower nominal interest rate. ➤ International Fisher Effect (IFE) ➤ Central banks adjust interest rates based on inflation expectations ⇩ 🅻🅸🅽🅺🆂 ⇩ **🏷️ Tags**: #💰/Economy-Class #💰/Noun **🗂 Menu**: ⌈[[✢ M O C ➣ 02 ⌈F E B - 2 0 2 5⌉ ✢|2025-F E B-MOC]]⌋ ➤ ⌈[[Money Neutrality (货币中性化) -L012]]⌋ ➤ ⌈[[Interest Rates]]⌋ **📑 PDF**：[[Economic L012 - Money Supply, Quantity Equation Of Exchange， Fisher Effect, Central bank .pdf]] **🌐 Link**: ---   ## I. Definition & Key Concept - The **Fisher Effect**, proposed by economist **Irving Fisher**, describes the **relationship between nominal interest rates, real interest rates, and inflation**. ##### Formula >![[The Fisher Effect Equation.png|#Left|300]] >- **i** = Nominal Interest Rate (名义利率) >- **r** = Real Interest Rate (实际利率) >- **π** = Expected Inflation Rate (预期通胀率) 📌 **Key Idea:** - **In the long run, nominal interest rates adjust to changes in expected inflation** while the real interest rate remains relatively stable. - **Higher inflation expectations → Higher nominal interest rates.** - **Lower inflation expectations → Lower nominal interest rates.** --- ## II. Fisher Effect in Monetary Policy & Investments ### 🏦 Implications for Central Banks - **If inflation increases**, central banks may raise nominal interest rates to maintain stable real returns. - **If inflation expectations decrease**, central banks may lower nominal rates to stimulate borrowing and spending. 📖 **Example:** - If the **inflation rate is 3%** and the **real interest rate is 2%**, the nominal interest rate should be: >i = 2% + 3% = 5% ### Implications for Investors & Borrowers ✅ **Investors demand higher nominal interest rates** when they expect inflation to rise, to maintain real returns. ✅ **Borrowers prefer lower nominal interest rates** because inflation erodes debt value over time. 📌 **Key Insight:** - **Higher expected inflation → Higher bond yields (to compensate for inflation).** - **Lower expected inflation → Lower interest rates, benefiting borrowers.** --- ## III. International Fisher Effect (IFE) - **The International Fisher Effect (国际费雪效应)** extends Fisher’s theory to exchange rates. - **It suggests that currencies with higher nominal interest rates will depreciate over time due to higher inflation expectations.** - Investors expect **real returns to be equal across countries** after adjusting for exchange rate changes. 📖 **Example:** - If **Country A** has an interest rate of 6% and **Country B** has 2%, Country A’s currency is expected to **weaken** over time due to higher inflation. 📌 **Real-World Applications:** - **Currency Trading & Forex Markets:** Investors analyze interest rate differentials to predict currency movements. - **Global Investments:** Higher interest rates don’t always mean a stronger currency if inflation erodes value. --- ![[Exercise - Money Neutrality -Nominal Rate.png]] ## Summary ✅ **The Fisher Effect states that nominal interest rates = real interest rates + expected inflation.** ✅ **Central banks adjust interest rates based on inflation expectations.** ✅ **Investors and borrowers consider real interest rates when making financial decisions.** ✅ **The International Fisher Effect links interest rate differentials to exchange rate movements.**