Real Interest Rate (Fisher Equation)
Real Interest Rate (Fisher Equation)
\[r = \frac{1+i}{1+\pi} - 1\]
Variables
r = real interest rate
i = nominal interest rate
pi = inflation rate
Description
What is this formula?
The Fisher equation calculates the real interest rate by removing the effect of inflation from the nominal interest rate.
When to use it
Use this formula when evaluating the true purchasing power growth of investments or loans under inflation conditions.
Example
If the nominal interest rate is 10% and inflation is 4%:
r = (1 + 0.10) / (1 + 0.04) - 1 ≈ 0.0577
The real interest rate is approximately 5.77%.
Applications
Macroeconomics, investment analysis, inflation studies, banking, and financial planning.
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