Fisher Model

The Fisher Model, developed by economist Irving Fisher, describes the relationship between real interest rates, nominal interest rates, and expected inflation. It suggests that the nominal interest rate (the advertised rate) equals the real interest rate (the true cost of borrowing) plus expected inflation (the anticipated rise in prices). Essentially, if inflation expectations increase, lenders will demand higher nominal rates to protect their purchasing power, ensuring they earn a real return. This model helps explain how inflation expectations influence borrowing costs and interest rates in the economy.