International Fisher Relation
Economist Irving Fisher is credited with the inflation expectations theory of interest rates, which proposes that the nominal risk free interest rate (i.e., developed economy government issued debt) consists of a real interest rate plus and an inflation expectation.
1 + r f nominal = (1 + r f real)(1 + E(I))
The International Fisher Relation connects the difference in nominal risk free interest rates between countries to their expected inflation rates.
(1+ r f X)/( 1+ r f Y) = ((1 + E(IX)/(1 + E(IY))
A flaw in the international Fisher relation is that the model does not take business cycle differences between economies into consideration.
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- CFA Level 2: Economics - Introduction
- Economic Growth
- Changes in Productivity: The One-Third Rule
- The Productivity Curve
- Economic Growth Theories
- Government Regulation, Deregulation, and Regulatory Behaviour
- Gross Domestic Product (Measuring Economic Activity)
- International Trade & Trade Restrictions
- Balance of Payments
- Foreign Exchange Rate Systems and Parity Relationships
- Foreign Exchange Floating Rate Systems
- Fixed Exchange Rate Systems
- Overview of Currency Markets
- Forward Exchange Rates
- Interest Rate Parity
- Purchasing Power Parity (PPP)
- International Fisher Relation
- Uncovered and Covered Interest Rate Parity Relationship
- Forecasting Exchange Rates
- CFA Level 2 Economics – Recommendations