Fisher hypothesis

In economics, the Fisher hypothesis (sometimes called the Fisher effect) is the proposition by Irving Fisher that the real interest rate is independent of monetary measures, specifically the nominal interest rate and the expected inflation rate. The term "nominal interest rate" refers to the actual interest rate giving the amount by which a number of dollars or other unit of currency owed by a borrower to a lender grows over time; the term "real interest rate" refers to the amount by which the purchasing power of those dollars grows over time—that is, the real interest rate is the nominal interest rate adjusted for the effect of inflation on the purchasing power of the loan proceeds.

The relation between the nominal and real rates is approximately given by the Fisher equation, which is

This states that the real interest rate (${\displaystyle r}$) equals the nominal interest rate (${\displaystyle i}$) minus the expected inflation rate (${\displaystyle \pi ^{e}}$). The equation is an approximation. The difference between this and the absolutely correct equation is very small unless either the interest rate or inflation is very high, or it is being applied over a long period of time. The accurate statement, expressed using continuous compounding, is

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