In late December 1990, one-year German Treasury bills yielded 9.1%, whereas one-year U.S. Treasury bills yielded 6.9%. At the same time, the inflation rate during 1990 was 6.3% in the U.S., double the German rate of 3.1%
Were these inflation and interest rates consistent with the Fisher Effect?
What will be an ideal response?
Answer: They are not consistent is one assumes that future inflation will equal past inflation. If that were the case, the real interest rate in Germany would probably be 6% (9.1% - 3.1%) and in the United States it would be 0.6% (6.9% - 6.3%). What was probably happening was that the markets were anticipating a fall in the U.S. inflation and a rise in German inflation. If so, then the rates are consistent with the Fisher Effect, which states that nominal interest rates are based on expected, not past inflation.
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