Fisher Effect: The higher the inflation expectations, the greater the pressure on the securities market.

Fisher Formula:
i = (RIR + Expected-IP) + (RIR*Expected (IP)).

  • ( i ) – Nominal interest rate
  • ( RIR ) – Real interest rate
  • {Expected-IP} – Expected inflation
  • {Expected-IP}- Expected change in the inflation rate

Intuitively: The level of nominal interest rates approximately equals the real rate plus inflation expectations (the second part of the formula is a very small number).

P.S.
The graph shows the correlation between short-term treasury bill interest rates and actual inflation… It appears that investing in risk-free assets serves as a hedge against inflation…

Source:

Financial Markets and Institutions – by A. Saunders, M. Cornett & O. Erhemjamts

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