The Fisher Effect, Inflation, and Real Growth Rates
Journal of Financial Education
fisher effect, inflation, growth rates
Finance and Financial Management
The Fisher effect links changes in the expected inflation rate to corresponding changes in the nominal risk-free interest rate. In discrete time, the nominal rate is equal to the real rate plus the inflation rate plus an additional product term between the inflation and real rates. This paper examines the valuation of endowments under nominal and real growth rates. We use a simple method that avoids the need to sum a geometric series. An endowment growing in nominal terms is valued as a level perpetuity discounted by the real rate. An endowment growing in real terms is valued by discounting it at the nominal rate less the inflation and the growth rates with a discrete compounding adjustment for the inflation and growth rates.
Dennis, Steven A.; Raj, Mahendra; and Thurston, David C. (1996). The Fisher Effect, Inflation, and Real Growth Rates. Journal of Financial Education 22, 65-68. Retrieved from http://digitalcommons.kent.edu/finpubs/1