Domestic Fisher Effect

Domestic Fisher Effect Meaning:
In foreign exchange terminology, the Domestic Fisher Effect refers to the hypothetical long-term relationship between a country’s interest rates and its observed inflation rate that was originally developed by Irving Fisher. His hypothesis proposed that the real interest rate is equal to the nominal interest rate minus the rate of inflation.

Domestic Fisher Effect Example:
In practice, the Domestic Fisher Effect implies that a given increase in inflation will result in an equal increase in the nominal interest rate, if the real interest rate holds steady. This theoretical relationship has been used to propose that the real interest rate for an economy is independent of monetary measures, which would include a central bank setting the nominal domestic interest rate, since such manipulation will be offset by changes in the rate of inflation.