Jurriaan Bendien wrote: > When I have looked into the background of the conceptual definition of the “real interest rate”, I have found that (1) it changes across time, (2) different authors use many different “key” interest rates to represent the “real interest rate” (for example, a 3-month Treasury Bill or a five-year bill, or a full mortgage etc.). (3) There is no real agreement about the details of the calculation of the statistic.<
As far as I know, there are only two methods of calculating the inflation-corrected interest rate. One is used in finance; the other is an approximation often used by economists. As far as I know, the conceptual definition of the "real" rate has not changed over time, though it's possible that the formula used to estimate it has changed. I had already noted that different people use different "key" rates. It depends on what kind of question is being asked. >It is true that the nominal interest rate for particular types of government securities is fixed by regulation, but certainly e.g. for mortgages or credit cards what is economically significant is a statistic of the average interest rates. It is all really pretty political stuff, since obviously different groups of economic actors are affected most by different types of interest rates, as I already suggested earlier.< There are no "average interest rates" except as a sloppy term used to describe "general credit conditions" (which also involves credit rationing). I don't know why the "average interest rate" keeps on coming up. It's basically irrelevant. In the US, the only interest rate in the US that's fixed by "regulation" is the discount rate, i.e., the interest rate on normal loans from the Fed to banks. I think that it's possible that some interest-rate ceilings exist out there, but nowadays, almost all rates are below their ceilings. > What most economics authors have in common, is that they try to find a concept of the “true cost of borrowing”. You have the ... Fisher equation..., where the nominal interest rate = the real interest rate + the expected inflation rate, so that the real interest rate = the nominal interest rate minus the expected interest rate, and so on. ... Point is, what the real cost of borrowing is thought to be, will depend on your choice of rate types, and on your inflation assumptions (never mind tax and ancillary charges). < This is all stuff I said before. The Fisher equation is the approximate formula. And of course, I already mentioned that there are lots of different types of interest rates. This is very repetitive. > Now what bankers and IMF people try to do, for example, is to establish a “neutral real interest rate” (NRIR) for the purpose of a macroeconomic analysis that can inform monetary policy. They claim sometimes that this concept originates with the Swedish economist Knut Wicksell’s rent theory ... Wicksell was supposed to be the first to define the “natural real interest rate” as the rate at which savings and investment are equal ..., which in turn, assuming no frictional disturbances, would equal the marginal product of capital in the long-run (?). < this is irrelevant to the discussion we were having, as all the other stuff about the NRIR. So I've dropped it. I said: >> 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.<< > What I meant is, that what influences people is only the “actual, observable rates of interest”, and not a theoretical rate of interest. I do not deny at all, that people can recognize the reducing buying power of money, and its effect on their loan repayment. < then we agree. >But probably most people are not such rational actors as economics makes them out to be – the main effect is, that they sense they are a bit more constrained in what they can spend, or reschedule their mortgage.< I never said anything about economic rationality. I don't see why it's important here. -- Jim Devine / "Reality is that which, when you stop believing in it, doesn't go away." -- Philip K. Dick
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