Fisher Effect is a term used in finance for forecasting the movement of currency exchange rate in the future. The core idea of this term is the expected exchange rate between two countries should be approximately equivalent to the difference between the nominal interest rates of two countries. This term can be expressed as formula as E = i1-i2 which “E” stand for the exchange of the currency exchange rate, i1 and i2 stand for the interest rate of the country A and country B respectively.

The Fisher Effect, developed by Irving Fisher, explains the link between interest rates and inflation rates within a given country. According to Aina, this relationship contradicts classical monetary theory, which states that interest rates are independent of price level.

The International Fisher Effect, also known as the assumption of Uncovered Interest Parity, which states that an expected change in the current exchange rate between any two currencies should be equivalent to the difference between the two countries’ nominal interest rates at that point in time. Essentially, the country with the higher interest rate generally will have a higher inflation rate.