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; LITERATURE REVIEW

2.1 理论——2.1 THEORY

In 1930 Irving Fisher investigated the relationship between UK interest rates and inflation. In his analysis of the relationship he decomposed interest rates into nominal interest rates and real rates of interest. The connection of all three variables is described below:

= - (1.1)

With:
( ) = Real interest rate, simply defined as the improvement in purchasing power
= Nominal rate of interest, simply defined as the rate of interest paid by banks
( ) = Rate of inflation, simply defined as the general rise in price levels in the economy. It states that the real rate of interest reflects the difference between the nominal interest rate and the rate of inflation. Rearranging the equation produces:

= + (1.2)

More accurately, because future rates of inflation cannot be predicted, expected rates of inflation are used, therefore the equation becomes:

= + (1.3)

The above Fisher equation shows that the summation of the real rate of interest ( ) and the expected rate of inflation ( ) can be expressed as the nominal rate of interest ( ). The equation implies that changes in real interest rates and/or expected rates of inflation would change the nominal rate of interest.

Fisher (1930) puts forward that because capital productivity and technological constraints are the most significant factors that affect real interest rates, major changes in nominal rates of interest should reflect increases in expected inflation and unstable prices.

In a practical context, using rational expectations and the theory of efficient capital markets the fisher equation can encompass the actions of rational agents such as savers. Most savers would understand the risk associated with an expected reduction in their future purchasing power, and the negative effect it would have on their own wealth. As a precaution to this, most would chose to invest their money. This leads to a overall increase in the level of investment and the demand for financial assets subsequently increasing the amount of loanable funds, which in turn would lead to a reduction in real rate of interest1. Fisher (1930) supported that the increase in expected rates of inflation would be larger than the decrease in real interest rates to such a level that, nominal interest rates would rise following a rise in expected rates of inflation.

The one-for-one relationship between the nominal interest rate and expected rates of inflation, with the notion of a constant real rate of interest over time, is what is commonly referred to as the Fisher effect.

As mentioned earlier, there is a vast amount of empirical literature that has tested the extent to which the Fisher effect holds. Significant differences in estimation techniques, econometric methodologies, proxies for inflationary expectation, and countries that have been analysed have led to a variety of results. The next section discusses the variety of studies and focuses on literature that has tested for the fisher effect in developing or emerging economies.

2.1 文献文综—— 2.1 LITERATURE REVIEW

Since the seminal work of Fisher (1930) the Fisher hypothesis ha