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Working Paper
Fisher, Thorton and the analysis of the inflation premium
Virtually all references to the Fisher Effect assume that its appearance in nominal interest rates is a simultaneous result of borrower and lender effects. However, Irving Fisher, and Henry Thornton before him emphasized the activist role on the borrower (demand) side of the loan market. Their reasoning is extended here. Borrowers are seen increasing their demands for loans not because they necessarily anticipate inflation, but because the results of inflationary spending first appear on their income statements as higher profits. Ultimately lenders' loan supply schedules shift to the left as ...