DEVOLUTION OF THE FISHER EQUATION: Rational Appreciation to Money Illusion
In Appreciation and Interest Irving Fisher (1896) derived an equation connecting interest rates in any two standards of value. The original Fisher equation (OFE) was expressed in terms of the expected appreciation of money [percent change in E(1/P)] whereas the ubiquitous conventional Fisher equation (CFE) uses expected goods inflation [percent change in E(P)]. Since Jensen?s inequality implies the non-equivalence of the two equations, the OFE is not subject to standard criticisms of non-rationality leveled against the CFE. The puzzling substitution of inflation for expected money appreciation in Fisher (1930) is resolved by taking into account Fisher's theory of “money illusion.”
|Date of creation:||Jun 2006|
|Date of revision:||Jun 2008|
|Contact details of provider:|| Postal: 7-22-1 Roppongi, Minato-ku, Tokyo, Japan 106-8677|
Web page: http://www.grips.ac.jp/r-center/en/discussion_papers/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Evans, Martin D D & Lewis, Karen K, 1995.
" Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?,"
Journal of Finance,
American Finance Association, vol. 50(1), pages 225-253, March.
- Martin D.D. Evans & Karen K. Lewis, 1993. "Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?," Working Papers 93-06, New York University, Leonard N. Stern School of Business, Department of Economics.
- Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
- Robert W. Dimand, 1999. "Irving Fisher and the Fisher Relation: Setting the Record Straight," Canadian Journal of Economics, Canadian Economics Association, vol. 32(3), pages 744-750, May.
- Wallace, Myles S & Warner, John T, 1993. "The Fisher Effect and the Term Structure of Interest Rates: Tests of Cointegration," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 320-324, May.
- Francisco Carneiro & Jose Angelo & C. A. Divino & Carlos Rocha, 2002. "Revisiting the Fisher hypothesis for the cases of Argentina, Brazil and Mexico," Applied Economics Letters, Taylor & Francis Journals, vol. 9(2), pages 95-98.
- Pierre-Daniel G. Sarte, 1998. "Fisher's equation and the inflation risk premium in a simple endowment economy," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 53-72.
- Ioannis Karatzas & Martin Shubik & William D. Sudderth & John Geanakoplos, 2003. "The Harmonic Fisher Equation and the Inflationary Bias of Real Uncertainty," Cowles Foundation Discussion Papers 1424, Cowles Foundation for Research in Economics, Yale University.
- John Geanakoplos & Ioannis Karatzas & Martin Shubik & William D. Sudderth, 2004. "The Harmonic Fisher Equation and the Inflationary Bias of Real Uncertainty," Yale School of Management Working Papers ysm388, Yale School of Management.
- Mishkin, Frederic S & Simon, John, 1995. "An Empirical Examination of the Fisher Effect in Australia," The Economic Record, The Economic Society of Australia, vol. 71(214), pages 217-229, September.
- Frederic S. Mishkin & John Simon, 1994. "An Empirical Examination of the Fisher Effect in Australia," RBA Research Discussion Papers rdp9410, Reserve Bank of Australia.
- Frederic S. Mishkin & John Simon, 1995. "An Empirical Examination of the Fisher Effect in Australia," NBER Working Papers 5080, National Bureau of Economic Research, Inc.
- Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-118, February.
- Ahmed, Shaghil & Rogers, John H., 2000. "Inflation and the great ratios: Long term evidence from the U.S," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 3-35, February.
- Shaghil Ahmed & John H. Rogers, 1998. "Inflation and the great ratios: long-term evidence from the U.S," International Finance Discussion Papers 628, Board of Governors of the Federal Reserve System (U.S.).
- Ernst Fehr & Jean-Robert Tyran, 2001. "Does Money Illusion Matter?," American Economic Review, American Economic Association, vol. 91(5), pages 1239-1262, December.
- Ernst Fehr & Jean-Robert Tyran, "undated". "Does Money Illusion Matter?," IEW - Working Papers 012, Institute for Empirical Research in Economics - University of Zurich.
- Ernst Fehr & Jean-Robert Tyran, 2000. "Does Money Illusion Matter?," IEW - Working Papers 045, Institute for Empirical Research in Economics - University of Zurich.
- Hutchison, Michael M & Keeley, Michael C, 1989. "Estimating the Fisher Effect and the Stochastic Money Growth Process," Economic Inquiry, Western Economic Association International, vol. 27(2), pages 219-239, April.
- Robert W. Dimand & John Geanakoplos, 2005. "Celebrating Irving Fisher," American Journal of Economics and Sociology, Wiley Blackwell, vol. 64(1), pages 3-18, January.
- William J. Crowder & Mark E. Wohar, 1999. "Are Tax Effects Important in the Long-Run Fisher Relationship? Evidence from the Municipal Bond Market," Journal of Finance, American Finance Association, vol. 54(1), pages 307-317, February.
- Peter N. Ireland, 1996. "Long-term interest rates and inflation: a Fisherian approach," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 21-36.
- Hansson, Ingemar & Stuart, Charles, 1986. "The Fisher Hypothesis and International Capital Markets," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1330-1337, December.
- Robert Mundell, 1963. "Inflation and Real Interest," Journal of Political Economy, University of Chicago Press, vol. 71, pages 280-280.
- Blejer, Mario I. & Eden, Benjamin, 1979. "A note on the specification of the fisher equation under inflation uncertainty," Economics Letters, Elsevier, vol. 3(3), pages 249-255. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:ngi:dpaper:08-04. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.