Economics Questions

Re: Fisherian Theory of Interest

Caley McKibbin — Sat, 12 Feb 2011 02:21:27 GMT

Probably related somehow to GDP as a measure of economic growth. I've been wondering that for 7 years.

Re: Fisherian Theory of Interest

Michelangelo — Sat, 12 Feb 2011 02:16:25 GMT

Why is it then that the mainstream is so scared of deflation if the real interest rate is independent of monetary variables?

Re: Fisherian Theory of Interest

Caley McKibbin — Sat, 12 Feb 2011 01:49:45 GMT

I don't know anything about Fisher. But, that is obviously true about interest rates adjusting downward for deflation. In the hearing with Ron Paul one of the boneheads was ranting and raving about how deflation would destroy people already in debt with adjustable rate mortgages. Either DiLorenzo or Vedder said something against that, probably this.

Re: Fisherian Theory of Interest

Esuric — Sat, 12 Feb 2011 01:46:59 GMT

If this is true then the fear that many mainstream economist have of deflation harming debtors should be null as people got lower than otherwise rates because of the expected deflation.

Indeed, and this is how it's taught in any undergraduate course in monetary theory. The Fisher effect (r_r=r_n-pie^e) says that the real rate of interest is entirely independent of monetary variables (not affected by either inflation or deflation).

Fisherian Theory of Interest

Michelangelo — Sat, 12 Feb 2011 01:39:32 GMT

I've always had a problem with the Fisherian Theory of Interest, even before I really cared for Austrian economics. It emphasized the issue of inflation far too much and ignored what 'real interest' was. Recently though I've been rethinking my objections. Might I get everyone else's thoughts?

With the Fisher theory we can say that interest rates take into account of expected inflation and so add on a premium on what the interest rate would be otherwise. Can not the opposite be said as well though? That in a situation where deflation is expected the 'real interest' would receive a discount.

If this is true then the fear that many mainstream economist have of deflation harming debtors should be null as people got lower than otherwise rates because of the expected deflation.