Jurriaan Bendien <[email protected]> wrote:
> ... Certainly, an “average real interest rate” can
> be expressed as a vector, or as several related vectors. But what data and
> weightings you use, to compute the vectors, is not incontestable. At that
> point you might well say, as I did, well who really knows what it is? It is
> at best a fairly arcane statistical convention.
There's no need to refer to an average interest rate at all, though
it's possible that it might help with efforts to try to understand
what's going on. (I doubt it.) Similarly, there is no need for
weighting the vector of interest rates unless one wants to use them
for some sort of theoretical reason. The weights are not a
"statistical convention" (arcane or otherwise). In fact, I've never
seen (or heard of) any research involving a weighted average of
interest rates. Usually, one "key" interest rate is used to represent
others. Which interest rate it is depends on the research question.
There is no general answer.
> I agree that the elements of a vector of nominal interest rates are “very
> observable”; I am merely arguing that the inflation-adjusted composite rate
> is not truly “real”. It is a symbolic representation, which is indicative of
> a situation, assuming some standard conditions.
Real interest rates are not the opposite of "imaginary" ones. Rather,
calculating the "real" interest rate is simply an effort to correct
nominal interest rate for the way that the purchasing power of money
usually changes over time.
These rates aren't dubbed "real" because they exist outside our
consciousness of them. There is, however, some sort of "real" interest
rate out there -- since people do correct for inflation in making
inter-temporal decisions, at least for moderate-to-high inflation
rates. The economist's estimated "real" interest rate is merely an
effort to measure it. As usual, correcting for inflation is more of an
art than a science.
I don't know what it means to say the estimated inflation-corrected
interest rate is "a symbolic representation" or what's wrong with
using symbols.
> I agree also that different types of interest rates are generally positively
> correlated, and that differences in rates applying to different borrowing
> terms are fairly predictable. The distinction between nominal and real is
> perfectly acceptable.
right. But if the distinction between nominal and real is "perfectly
acceptable," why are you arguing with me?
> The only problem is, I think, that the average real interest rate is a
> composite that doesn’t truly exist in the real world.
Again, I haven't seen anyone use the concept of an "average interest
rate," real or otherwise. It's perhaps possible to calculate, but I
wouldn't simply calculate the mean of interest rates or even a
weighted mean. (As a start, if I wanted to calculate an "average
interest rate," I'd divide total interest income paid during a period
(such as a week) by the average amount of debt owed during that week.
Inflation would have to be corrected for if it is stated at an annual
rate.)
>... I guess that is where we have a slight epistemic and ontological
> disagreement. Your idea is that the measured real interest rate is
> indicative of a really existing number that influences real-world economic
> behavior. What I am arguing is, that the latter number doesn’t have any real
> existence or influence as a social force, all that really exists are the
> different actual interest rates charged, which are associated with various
> economic functions.
To say that the "real" interest rate "doesn't have any real existence
or influence as a social force" is saying that real-world people
making inter-temporal decisions under conditions of moderate or
greater inflation do not know that the money they pay back (or
receive) in the future will have a lower ability to buy real goods and
services than money borrowed (or loaned) right now or do not make any
decisions based on that knowledge.
_Of course_, what "really exists" are different actual (nominal)
interest rates charged, along with the inflation rate. However, if one
wants to know what's going on in the real world (and maybe even make
predictions), using abstractions such as the "real interest rate"
(e.g., the "real prime rate") can be revealing.
> ... I suppose an economist could be like Plato and regard the “real interest
> rate” as a “pure form” about whose real and eternal existence we can only
> know through its shadowy appearance, but there is really no proof that the
> pure form exists at all, other than on a graph of coordinate points. I think
> it is only a theoretical generalization or convention. ...
No, I am not talking about an idealist method such as that of Plato.
An acquaintance once referred to the method of using "material types"
(in comparison to Weber's "ideal types" or models). His definition of
that phrase was poor, but the phrase itself means a lot to me. There
are phenomena in the real world, such as commodities and interest
rates. We cannot know them directly (since the data do not -- and
cannot -- speak for themselves), so we use various abstractions to try
to understand them.
For example, to understand interest rates in general, one might choose
a specific rate (e.g., the "prime" rate). That's a theoretical choice,
where the only justification is that we actually get a better
understanding of what is going on (and what might happen in the
future). ("Better" refers to "fitting" real-world data.) If you're
trying to understand investment in new housing, the prime rate isn't a
good choice. The interest rate on thirty-year standard mortgages is a
better choice (in the US at least), with correction for expected
inflation.
> When the financial crash occurred, there was great dismay about the
> mathematical models, their failure to track critical relationships or
> predict outcomes and so on. But what was the real cause of the dismay? I
> think it was, ultimately, that all kinds of economic relationships and
> entities had been projected through models, which do not really exist.
I'd say instead that the problem with the models was that their
estimated parameters were based on limited samples (taken during calm
times) and their users took the models too seriously. The financial
models are usually not completely wrong. Usually, they work during
calm times when "black swans" and bubbles don't occur. The problem was
that the models' users assumed that _all_ times are calm ones. That's
an extra assumption (on top of those made by the original models)
which reflected expectations that characterize a bubble mentality.
> What I mean by “actual credit costs” is the actual monetary cost of credit,
> the actual money that changed hands. That is different to some “imputed
> cost” which is calculated according to some theory. Somebody might say e.g.
> “you paid 10 dollars interest on a hundred dollars, but in reality you
> should value that cost differently, it was really 15 dollars because of
> such-and such”. But the ten dollars is the actual cost, the basis,
> irrespective of whether I later decided to factor in inflation, tax rates or
> ancillary charges.
I don't see anything wrong with imputing numbers (e.g., in the US
NIPA, homeowners' incomes include imputed rent on the houses they own)
as long as you're conscious of what you're doing. I don't see the
point in rejecting all theory and all abstraction. People can't think
without abstractions.
> I don’t object at all to idealizations as such, or “other things being
> equal” models. They are often necessary and useful. What I specifically
> object to, is when it is proposed, without any warrant, verifying procedure
> or proof, that the idealization itself is “real”, in the sense that its
> content really exists.
you're confusing short-hand ("real interest rates") with some sort of
theoretical assertion.
and _of course_ no theory can be justified without some sort of
empirical verification (unless it's acknowledged to be pure
mathematics) Just as people can't think without abstraction, we can't
think without empirical referents. Just as (pure) empiricism should be
rejected, so should (pure) rationalism.
--
Jim Devine / "Reality is that which, when you stop believing in it,
doesn't go away." -- Philip K. Dick
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