Testing the Fisher Effect in Economics

This assignment explores the Fisher Effect in economics and its relationship between inflation, nominal interest, and real interest. It discusses the assumptions of the Fisher Effect and the data source used for analysis.

Running head: ECONOMICS 1
Economics
Institution

ECONOMICS 2
Economics
1. No, I did not work in teams. I did the assignment individually.
2. I am trying to test the theory of the Fishers Effect. Fisher Effect is a theory of
economic, which describes the association between inflation, and the nominal and real interest.
(Pearce & Roley, 2014). It states that the real rate of interest is equil to the rate nominal interest
subtract the rate of inflation. The Effect has been stretched to the examination of the international
currency trading and the money supply. The growth of money affects both the rate of inflation
and rate of nominal interest (Miller et al, 2016). For instance, if an adjustment in central bank of
Canada monetary policy would drive Canada’s rate of inflation to increase by 10% and a similar
10% increase in the nominal interest rate. The three assumptions include:
Constant speed for cash
With regards to the Fishers theory, the velocity of cash is not affected by adjustments in
the quantity of cash. The velocity of cash is reliant on exogenous elements for instance, trade
activities, population, interest rate and habits of people. These elements are change very slowly
over time and are comparatively stable. Therefore, velocity tends to be constant so that any
adjustment in the money supply will not have an impact on the cash velocity.
Constant Volume of Transactions or Trade
The accumulated volume of transactions of trade is also presumed to be constant and is
not impacted by adjustments in the money quantities. Transactions are perceived as impartially
governed by elements like technological development, natural resources and population that
change slowly over time and are outside the equation.

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Cost Level is an inert element
With regards to the Fishers effect, the cost level is a passive element which insinuates
that the cost level is impacted by other elements of the equation, however, it does not impact
them. The cost level is the impact and not the root in the equation of Fishers (Mishkin, 2012).
3. The source of my data is the International Financial Statistics (IFS) from the IMF. The
rate of inflation is the degree at which prices rise over time, leading to a reduction in the value of
the purchasing money (Fatás & Mihov, 2001). The rate of nominal interest is the interest prior to
considering rate of inflation. It can also refer to the stated or the advertised rate of interest on a
loan, without contemplating the compounding of interest or any fees. The reason I have chosen
rate of inflation and the rate of nominal interest is that they are responsible for the Fishers effect.

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4.
5. My figure is consistent with the Fischer’s effect which states that the rate of real
interest is equivalent to the rate of nominal interest subtract the rate of inflation (Manuel et al.
2016). In conclusion, the growth of money affects both the rate of inflation and the rate of
nominal interest.
6. I used the Excel Statistical software. Plotting the data on the Y axis and the X axis was
a challenge to me, which I managed to overcome through taking more time to learn how to plot
the graph.

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References
Fatás, A., & Mihov, I. (2001). The effects of fiscal policy on consumption and employment:
theory and evidence (Vol. 2760). London: Centre for Economic Policy Research.
Miller, K. D., Jeffrey, F. J., & Mandelker, G. (2016). The “Fisher effect” for risky assets: An
empirical investigation. The Journal of finance, 31(2), 447-458.
Mishkin, F. S. (2012). Is the Fisher effect for real?: A reexamination of the relationship between
inflation and interest rates. Journal of Monetary economics, 30(2), 195-215.
Pearce, D. K., & Roley, V. V. (2014). Stock prices and economic news.