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Macro & Economy

Fisher Equation

Also called: Fisher effect, Fisher relation

The Fisher equation states that the nominal interest rate is roughly the real rate plus expected inflation. It's the bridge between what a bond quotes and what it buys, and it explains why rates rose to double digits in the 1970s without lenders earning much in real terms. The Fisher effect extends it into a prediction: a permanent rise in expected inflation should pass one-for-one into nominal rates.

Formula

Nominal rate ≈ Real rate + Expected inflation

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