Since the criteria inevitable conflict, there can be no formula that excels on all counts. This and various other desirable consistency properties are not hard to meet. The difficult question is the choice of weights in the two indexes, especially when a whole series of consistent period-to-period comparisons is desired, not just one isolated comparison.
He also seemed to approve the idea of chain indexes, in which the period 0 of the above formulas is not fixed in calendar time but is always the prior period, even though these violate one possible desideratum, that the relative change between two periods should be independent of the base used. He also wrote favourably of the practical advantages of an entirely different procedure, namely taking the median of an expenditure-weighted distribution of percentage price changes from one period to the next.
This formula has the pleasant property that the correlate of an Ideal price index is an ideal quantity index. Correa Walsh, another index number expert, on whose comprehensive treatise Fisher relied heavily from the beginning of his own investigations, reached the same conclusion independently at about the same time Walsh, These index number issues do not seem as important to present-day economists as they did to Fisher. Knowing that they are intrinsically insoluble, we finesse them and use uncritically the indexes that government statisticians provide.
This was a blow to the rising importance of bank deposits relative to currency as transactions media. Previous practice counted only government-issued currency as money, in modern parlance high-powered or base money, and regarded bank operations as increasing its velocity rather than adding to a money stock.
How does the quantity theory come out of the Equation of Exchange? The many qualifications for transitional adjustments are conscientiously presented, but the monetarist message is loud and clear. He rightly emphasizes the fact that, and the degree to which, receipts and payments are imperfectly synchronized.
He seeks the determinants of velocity in such features of social and economic structure as the frequency of wage and bill payments and the degree of vertical integration of firms. His belief that these institutions change only slowly supports his contention that velocities are exogenous constants.
The issue is overblown; the same phenomena can be described in either language. If the other variables in the equation are defined and measured in the same way, then V and k are just reciprocals each of the other.
Fisher himself discusses hoarding. His choice of the latter course compels attention to the structure, behaviour and regulation of banks. It is hard to attach meaning to the real volume of financial transactions, and therefore to see why a T that includes them should be a constant or exogenous term in the equation. On the other hand, modern students of money demand tend simply to forget transactions other than those on final payments.
Partly for this reason, he ignores interest rate effects on demand for transactions media. In his day there may have been more excuse for these omissions than there was later. But they are still surprising for an author who elsewhere pays so much attention to the effects of interest rates and opportunity costs on behaviour.
Fisher discusses in detail the implications of foreign transactions for the elements of the Equation of Exchange and for the quantity theory. He recognizes that tendencies towards purchasing-power parity, even though imperfect, make money supplies in any one country endogenous, tie prices to those of other countries and enhance quantity adjustments to monetary shocks in the short run.
Much of the book applies, therefore, to the gold standard economies in aggregate. Indeed, Fisher finds the increase in gold production after to be the main cause of price increases throughout the world. Macroeconomics: Business Fluctuations and the Great Depression. His views were much more subtle than straightforward monetarism, but they are scattered through his writings and not systematically integrated. Consider the following non-neutralities emphasized by Fisher:. It is frequently misused.
Like the Equation of Exchange, it is first of all an identity, from which, for example, an unobservable value of r can be calculated from observations of the other two variables. The Fisher equation is frequently cited nowadays in support of complete and prompt pass-through of inflation into nominal interest rates.
Moreover, from on he believed that adjustment of nominal interest rates to inflation takes a very long time. This he confirmed by sophisticated empirical investigations, regressions in which the formation of inflation expectations was modelled by distributed lags on actual inflation.
During the transition, inflation would lower real rates; nominal rates would adjust incompletely. The effect was symmetrical; he attributed the severity of the Great Depression to the high real rates resulting from price deflation. Moreover, Fisher was quite explicit about the effect of these movements of real interest rates on real economic variables, including aggregate production and employment. In his accounts of cyclical fluctuations in business activity, and especially of the Great Depression, they play the key role.
In the early s he came to a very modern position. Real variables like production and employment are independent of the level of prices, once the economy has adjusted to the level. But they are not independent of the rate of change of prices; they depend positively on the rate of inflation. He was just one derivative short of the accelerationist position Friedman, ; in a little more time he would have made that step, aware as he was of the difference between actual and expected inflation.
Anyway, his policy conclusion was that stabilizing the price level would also stabilize the real economy. The essential features are that debt-financed Schumpeterian innovations fuel a boom, followed by a recession which can turn into depression via an unstable interaction between excessive real debt burdens and deflation.
Note the contrast to the Pigou real balance effect according to which price declines are the benign mechanism that restores full-employment equilibrium. Fisher did not provide a formal model of his latter-day cycle theory, as he probably would have done at a younger age.
The point here is that he came to recognize important non-monetary sources of disturbance. These insights contain the makings of a theory of a determination of economic activity, prices, and interest rates in short and medium runs. Moreover, in his neoclassical writings on capital and interest Fisher had laid the basis for the investment and saving equations central to modern macroeconomic models. Had Fisher pulled these strands together into a coherent theory, he could have been an American Keynes.
Fisher would have done it all himself. He was right. Characteristically, he crusaded vigorously for his cause—in speeches, pamphlets, letters and personal talks with President Roosevelt and other powerful policy-makers. Characteristically too, as his letters home I.
Fisher, , p. Today, four decades later, economists can confirm the judgement and prediction of that eulogy.
Mathematical Investigations in the Theory of Value and Prices. Reprinted, New York: Augustus M. Kelley, Appreciation and interest. AEA Publications 3 11 , August, — Elementary Principles of Economics.
New York: Macmillan. The best form of index number. American Statistical Association Quarterly 17, March, —7. A statistical relation between unemployment and price changes. International Labour Review 13, June, — Hollander, New York: Macmillan. The debt-deflation theory of great depressions. Econometrica 1 4 , October, — Arrow, K. Existence of an equilibrium for a competitive economy, Econometrica 22 3 , July, — Auspitz, R. Barber, W. Oxford Reference. Publications Pages Publications Pages.
Recently viewed 0 Save Search. Your current browser may not support copying via this button. Subscriber sign in You could not be signed in, please check and try again. Username Please enter your Username. Fisher was the first to not only create price indexes, but to also highlight the distinction between nominal and real interest rates. He founded his own Index Number Institute, which collected and generated international price indexes between and Moreover, it was Fisher who defined real interest as the difference between the nominal interest rate and the expected inflation figure.
His other contributions to the economic discipline include the creation of the quantity theory of money. According to Fisher, the value of the money supply times its circulation within the economy equaled the product of the general price level and the aggregate number of transactions.
His specialty lied in translating complex economic theory in to simple text, as was exhibited in his book Theory of Interest which is renowned for its ease of understanding.
His legacy constitutes his position as president of the American Economic Association , an honor he was bestowed with in In , Fisher was appointed assistant professor of mathematics. But he subsequently sojourned abroad, and spent and studying in Paris and Berlin.
Shortly after his return, Irving Fisher was appointed assistant professor of economics at Yale in , and raised to full professor in He retained his position at Yale until his retirement. Fisher was a colorful and eccentric figure. He was involved in various social fads, notably Fisher was an avid advocate of eugenics and health food diets.
He made a fortune with his visible index card system - ancestral to the rolodex. Major works of Irving Fisher Trans.
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