In fisher equation, real interest rate = nominal interest rate - expected inflation rate

During calculating real interest rate, I've question that whether I can use actual inflation rate instead of expected inflation rate.

so, is it make sense? real interest rate = nominal interest rate - actual inflation rate


1 Answer 1


The Fisher equation as $$r=i-\pi$$ is little more than an approximation to the definition of the real interest rate $$r=\dfrac{1+i}{1+\pi} -1$$ where $r$ is the real interest rate, $i$ is the nominal interest rate and $\pi$ is inflation (the proportionate change in prices). You can complicate things by "coninuous compounding" but it makes little actual impact.

Looking backwards you should look at actual interest and actual inflation at the time of the loan. Looking forward, if you do not know what inflation or interest rates will be then you can only use estimated values and forecaster often prefer to estimate inflation and real interest rates, turning the Fisher equation round to give $$i = r+ \pi$$


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