Module 11.2 LOS 11.e: Fischer Relation and International Fischer Relation

The Fischer relation states that the nominal rate of return is approximately the sum of the real rate and the expected rate of inflation.

R_nominal = R_real + E(inflation)

International Fischer Relation

Combining the Fischer relation with the real interest rate parity (real rates converge across different markets), creates the international Fischer effect:

R_{nominal A} − R_{nominal B} = E(inflation_A) − E(inflation_B)

This states that the different in nominal interest rates between two countries is based on the difference between their expected inflation rates.

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