Explain international Fisher effect
Explain and also derive international Fisher effect.
Expert
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£.
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