GRIPS 政策研究センター Policy Research Center


Sep 1, 2007 Report No:07-05

DEVOLUTION OF THE FISHER EQUATION: Rational Appreciation to Money Illusion

  • James R. RhodesGRIPS
Field Economics
Language English

In 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.” [JEL: E40, B00, B31]

Keywords Fisher equation, Fisher hypothesis, Fisher effect, money illusion, nominal interest rate, purchasing power of money, value of money.
attachment 07-05.pdf