What is the Fisher Effect?

Fisher Effect Definition. The Fisher Effect is a theory that posits that the nominal interest rate consists of the real interest rate plus the expected rate of inflation. A forex corollary, the International Fisher Effect, states that money moves from low-yielding currencies into higher-yielding currencies, as investors chase higher returns on capital. If interest rates are assumed to be in equilibrium, then currency values will shift dependent upon the differences in inflation in each country. If inflation is harmonized on a global basis, then forex currency values will shift dependent on differences in the nominal rates of interest. A common forex strategy, sometimes called the “carry trade”, attempts to capitalize on this interest rate differential between countries. In economics, the Fisher hypothesis, sometimes referred to as Fisher parity, is the proposition by Irving Fisher that the real interest rate is independent of monetary measures, especially the nominal interest rate. The nominal interest rate is the interest rate you hear about at your bank. The real interest rate corrects the nominal rate for the effect of inflation in order to re-state how quickly the purchasing power of a savings account will rise over time.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.