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INTEREST WITH APPRECIATION: The Original Fisher Equation
en
Fisher equation
Fisher hypothesis
Fisher effect
money illusion
nominal interest rate
purchasing power of money
value of money
RHODES James R.
政策研究大学院大学 / National Graduate Institute for Policy Studies
In 1896, Irving Fisher published Appreciation and Interest and put into print the original form of the famous equation that links nominal and real rates of interest. In the past half century, a voluminous literature has misrepresented and misinterpreted Fisher's contribution. The conventional "Fisher equation" (CFE) is expressed in terms of expected inflation, whereas the original Fisher equation (OFE) uses the expected appreciation of money. Since the OFE is written in terms of the value of money (1/P), not the value of goods (P), criticisms of the conventional version based on Jensen's inequality do not apply. This paper derives the OFE and explicates its importance. It argues that Fisher's subtle, non-Patinkin, concept of "money illusion" provides an explanation for the departure from pure theory in his subsequent (1930) empirical work. The CFE, although using an inferior index for measuring expected appreciation, is more amenable to Fisher's psychological theory of monetary value.
JEL Classification Codes: E43, E40, G10
GRIPS Research Report Series
I-2002-0006
2002-09
GRIPS Policy Information Center
©2002 by James R. Rhodes. All rights reserved.
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