I am not so sure what we should understand the "real interest rate" to mean nowadays. It's normally thought of as the "average" inflation-adjusted cost of credit.
However, there are big differences in the cost of credit depending on what type of credit we are talking about, and so, while an "average" interest rate adjusted for the CPI might be an indicator, it may not say a lot about how much interest most ordinary people actually have to pay. The other aspect is that the official US inflation rate, currently claimed to be at circa 1.8%, may underestimate the real inflation rate. The "benchmark" US real interest rate is near-zero, but US consumer interest rates range to 5% or so, and on credit cards you can pay up to about 12% in the US. So presumably if you wanted a "really real" interest rate, then you would have to calculate weighted average costs for consumer credit and investment credit, factoring in the structure of outstanding debts by type. Just because some bankers can get cheap credit, it doesn't mean that everybody else can. No doubt Jim is right when he reports that the response of saving behavior to changes in real interest rates is very little. It would be interesting to investigate how, when a population is heavily indebted, this affects the Keynesian "multiplier effect". My hunch is that, the more people are in debt, the lower the multiplier effect of additional sales will be, in part because if people get extra income, they will very likely in the first instance use it to pay off debt. J.
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