What is a fisher effect? A fisher effect is a theory describing the long-run relationship between inflation and interest rates. The effect proposes that if the real interest rate is equal to the nominal interest rate minus the expected inflation rate, and if the real interest rate were to be held constant, that the nominal rate and the inflation rate have to be adjusted on a one-for-one basis. In other words, an increase in inflation will result in an increase in the nominal interest rate. An American economist, Irving Fisher, proposed this theory. He is also known for the Fisher equation, Fisher hypothesis and Fisher separation theorem.

The international fisher effect is a hypothesis in international finance that says that the difference in the nominal interest rates between two countries determines the movement of the nominal exchange rate between their currencies, with the value of the currency of the country with the lower nominal interest rate increasing. The Fisher hypothesis says that the real interest rate in an economy is independent of monetary variables. If real interest rates are equated across countries, then the country with the lower nominal interest rate would also have a lower rate of inflation and hence the real value of its currency would rise over time.

Understanding of the Fisher Effect can be essential to multinational companies, which operate in countries with differing inflation rates. Financial managers must forecast several countries exchange rates and inflation rates to accurately budget future growth. The Fisher Effect enables a company to evaluate two opportunities in countries with differing inflation rates and offering different nominal interest rates.

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