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.

Rnominal = Rreal + 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:

Rnominal A − Rnominal B = E(inflationA) − E(inflationB)

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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