Explain international Fisher effect

Question

Explain and also derive international Fisher effect.

Answer 1

International Fisher effect is achieved by joining the Fisher effect and also the comparative version of the PPP in its expectation form. Specifically, Fisher effect has

          E(∏$) = I$ - ∏$,

          E(∏£) = I£ - ∏£.

Assuming that rate of the real interest is same between the two countries, i.e., ∏$ = ∏£, and placing the above specified results in the PPP, i.e., E(e) = E(∏$)- E(∏£), we acquire the international Fisher effect: E(e) = I$ - I£.