Title

The Fisher Effect, Inflation, and Real Growth Rates

Publication Title

Journal of Financial Education

Publication Date

Fall 1996

Document Type

Article

Keywords

fisher effect, inflation, growth rates

Disciplines

Finance and Financial Management

Abstract

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.


Share

COinS