International fisher effect

The idea that nominal interest rate differentials reflect expected inflation differentials, because real interest rates are equal across countries. It combines the Fisher effect with real interest rate parity.

Where you will meet it

International fisher effect appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain the international parity conditions, namely interest rate parity in its covered and uncovered forms, the international Fisher effect, purchasing power parity and forward rate parity
  CFA Level II · Economics

  “The international Fisher effect says nominal rate differentials equal expected inflation differentials, so real rates are equal.”

• Set out how the international parity conditions link to one another
  CFA Level II · Economics

  “Fisher splits each nominal rate into a real rate plus expected inflation, so equal real rates across countries give the international Fisher effect.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with I · Glossary