Fisher Effect

What is the Fisher effect?

The Fisher effect (named for American economist Irving Fisher) describes how interest rates and expected inflation rates move in tandem.

Let’s look at a simple example: if you borrow $100 with an annual interest rate of 10%, you will end up paying the lender $110 at the end of the year. That’s $10 profit for the lender. But what if the inflation rate is also 10%? Well, that means the lender didn’t actually make money off lending you $100.

Now, if a lender anticipates a 10% inflation rate, they will charge a higher interest rate so that their rate of return isn’t zero.

In this video, we’ll check out the Fisher effect in action!

Interested in learning more about interest rates? Or what about inflation? Check out our Macro sections on Savings, Investment, and the Financial System and Inflation and Quantity Theory of Money.