THE FISHER EFFECT AND ALBANIAN APPLICATION

Abstract

This paper is discussing The Fisher effect. Firstly, there is going to be explained inbrief the theory of the Fisher equation, an identity that links the nominal interestrate to expected inflation, named after Irving Fisher. After that, there will be givenexamples of applications in some countries and finally we tested whether it can beapplied in Albanian economy or not. The examples of the countries studiedgenerally support the Fisher effect. There are some countries where strong Fisherhypothesis takes place, which is a one-to-one relationship; it is seen in 16 countries.There are others where simple Fisher hypothesis is verified. As for Albania, datawill be taken for a period of 15 years, 1995-2009. The data used are the actualinflation and the nominal interest rates, integrated in ex-post Fisher equation. Excelprogram has been used to elaborate the data, using data analysis and regressionfunctions. The outcome is supportive to Fisher effect. There exists a relationshipbetween inflation and interest rates in Albania. This relationship is strong but not aone-to-one as implied by Irving Fisher. In years 1996 and 1997 a political andsocial turmoil took place in Albania. This caused an abnormality in inflation trendand figures so that unnatural high two digit numbers of inflation were registered.This slight deviation in the trend of inflation leaves intact the relationship betweeninflation and interest rates. Nevertheless it has some effect, i.e. negative effect, onthe strength of the relationship. As a conclusion, Fisher effect theory holds true forAlbania as there exists a strong relationship between inflation and interest rates.