Fisher equation
In
In more formal terms, where equals the real interest rate, equals the nominal interest rate, and equals the inflation rate, then . The approximation of is often used instead since the nominal interest rate, real interest rate, and inflation rate are usually close to zero. [3][4]
Applications
Borrowing, lending and the time value of money
When loans are made, the amount borrowed and the repayments due to the lender are normally stated in nominal terms, before inflation. However, when inflation occurs, a dollar repaid in the future is worth less than a dollar borrowed today. To calculate the true economics of the loan, it is necessary to adjust the nominal cash flows to account for future inflation.[3]
Inflation-indexed bonds
The Fisher equation can be used in the analysis of
Cost–benefit analysis
As detailed by
Monetary policy
The Fisher equation plays a key role in the
See also
- Real versus nominal value (economics)
- Yield
- Yield curve
- Interest rate
- Inflation
References
- ^ Cooper, Russell and John, A. Andrew. Theory and Applications of Macroeconomics. Creative Commons. Retrieved 4 April 2021.
{{cite book}}
: CS1 maint: multiple names: authors list (link) - ISBN 9781578987450.
- ^ a b Cooper and Andrew op cit.
- ^ Fisher op cit.
- ^ Neely, Michelle Clark. "The Name Is Bond—Indexed Bond". Federal Reserve Bank of St. Louis. Retrieved 5 April 2021.
- .
Further reading
- ISBN 0-262-02436-5.
- Fisher, Irving (1977) [1930]. The Theory of interest. Philadelphia: Porcupine Press. ISBN 0-87991-864-0.