Fisher Equation

Fisher Equation:  Long-Term Treasury Bond Yield = r + e

r = real rate

e = inflationary expectations

Friedman's Extension of the Fisher Effect

• Monetary Decelerations
• Monetary Deceleratinos lead to lower bond yields
• First lower liquidity increases rates
• Increased rates depress the economy
• Depressed economy = lower incomes & output
• Lower incomes & output = lower inflation rate
• Lower inflation = Lower long-term bond yields
• Monetary Accelerations
• Monetary Accelerations lead to higher bond yields
• First higher liquidity decreases rates
• Decreased rates jump start the economy
• Growing economy = higher incomes & output
• Higher incomes & output = higher inflation rate
• Higher inflation = High long-term bond yields