DEVOLUTION OF THE FISHER EQUATION: Rational Appreciation to Money Illusion
AbstractIn Appreciation and Interest Irving Fisher (1896) derived an equation connecting interest rates in any two standards of value. The original Fisher equation (OFE, 1896) was expressed in terms of the expected appreciation of money (the real return on money) whereas the ubiquitous conventional Fisher equation (CFE, 1930) uses expected inflation. Since the OFE is based on the value of money (1/P) it is not subject to standard criticisms of irrationality leveled against the CFE. Fisher’s puzzling substitution of lagged inflation for expected money appreciation in 1930 is resolved by taking into account his theory of “money illusion.”
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Bibliographic InfoPaper provided by National Graduate Institute for Policy Studies in its series GRIPS Discussion Papers with number 07-05.
Length: 31 pages
Date of creation: Jun 2006
Date of revision: Sep 2007
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Fisher equation; Fisher hypothesis; Fisher effect; money illusion; nominal interest rate; purchasing power of money; value of money.;
Other versions of this item:
- James R. Rhodes, 2006. "DEVOLUTION OF THE FISHER EQUATION: Rational Appreciation to Money Illusion," GRIPS Discussion Papers 08-04, National Graduate Institute for Policy Studies, revised Jun 2008.
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- B00 - Schools of Economic Thought and Methodology - - General - - - History of Economic Thought, Methodology, and Heterodox Approaches
- B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
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