what is the fisher effect 
the fisher effect is an economic theory created by economist irving fisher that describes the relationship between inflation and both real and nominal interest rates the fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate therefore real interest rates fall as inflation increases unless nominal rates increase at the same rate as inflation understanding the fisher effectfisher s equation reflects that the real interest rate can be taken by subtracting the expected inflation rate from the nominal interest rate in this equation all the provided rates are compounded the fisher effect can be seen each time you go to the bank the interest rate an investor has on a savings account is really the nominal interest rate for example if the nominal interest rate on a savings account is 4 and the expected rate of inflation is 3 then the money in the savings account is really growing at 1 the smaller the real interest rate the longer it will take for savings deposits to grow substantially when observed from a purchasing power perspective countries will closely monitor the consumer price index cpi when determining inflationary measures nominal interest rates and real interest ratesnominal interest rates reflect the financial return an individual gets when they deposit money for example a nominal interest rate of 10 per year means that an individual will receive an additional 10 of their deposited money in the bank unlike the nominal interest rate the real interest rate considers purchasing power in the equation in the fisher effect the nominal interest rate is the provided actual interest rate that reflects the monetary growth padded over time to a particular amount of money or currency owed to a financial lender real interest rate is the amount that mirrors the purchasing power of the borrowed money as it grows over time importance in money supplythe fisher effect is more than just an equation it shows how the money supply affects the nominal interest rate and inflation rate in tandem for example if a change in a central bank s monetary policy would push the country s inflation rate to rise by 10 percentage points then the nominal interest rate of the same economy would follow suit and increase by 10 percentage points as well in this light it may be assumed that a change in the money supply will not affect the real interest rate as the real interest rate is the result of inflation and the nominal rate it will however directly reflect changes in the nominal interest rate 