3 ms·

No, we are in disagreement. I agree with the view that the real rate is determined by the supply of savings and the demand for funds. According to this view,

by lottin 5y ago

No, we are in disagreement. I agree with the view that the real rate is determined by the supply of savings and the demand for funds. According to this view, in the context of monetary policy, the real rate of interest is an exogenous variable, and the central bank can choose to set the rate of inflation or the nominal rate of interest, but not both.

adam_arthur 5y ago
Help me to understand your math then, because it doesn't track logically. realRate = nominalRate - inflationRate Raising nominal rates increases real rates due to higher nominal rate. Raising nominal rates decreases inflation, also raising real rates. Decreases inflation by reducing availability of credit, thus reducing effective money supply/demand. Please explain how the relationship works otherwise
- lottin 5y ago
  The relationship is pretty simple nominal_rate = real_rate + inflation_rate where the real rate is set exogenously. This implies a positive correlation between the nominal rate and the inflation rate, which is consistent with what we observe, e.g. https://miro.medium.com/max/1400/1*b3RDeRT7rPxYEdoFnZEJRg.png https://miro.medium.com/max/1400/1*b3RDeRT7rPxYEdoFnZEJRg.pn...
  - adam_arthur 5y ago
    Interest rates are correlated with inflation because the Fed historically raises interest rates when inflation rate is high. This is an obviously true observation and easily borne out by looking at history. Long term rates are distorted by QE right now. The market will price long term rates higher, when inflation is higher, sure. Short term rates typically set a floor on long term rates, outside of rare yield curve inversions. So not sure how your data relates. Short term rates set a floor on longer term rates, thus raising short term rates increases real rates on both fronts.
    - lottin 5y ago
      Long-term rates are not the same thing as rates in the long run. In the short run, monetary policy can create an imbalance and move the real rate of interest temporarily, but the real rate will adjust to its natural level as markets return to equilibrium, in the medium term. This is known as the Fisher hypothesis.

by lottin 5y ago

adam_arthur 5y ago

Help me to understand your math then, because it doesn't track logically. realRate = nominalRate - inflationRate Raising nominal rates increases real rates due to higher nominal rate. Raising nominal rates decreases inflation, also raising real rates. Decreases inflation by reducing availability of credit, thus reducing effective money supply/demand. Please explain how the relationship works otherwise

lottin 5y ago
The relationship is pretty simple nominal_rate = real_rate + inflation_rate where the real rate is set exogenously. This implies a positive correlation between the nominal rate and the inflation rate, which is consistent with what we observe, e.g. https://miro.medium.com/max/1400/1*b3RDeRT7rPxYEdoFnZEJRg.png https://miro.medium.com/max/1400/1*b3RDeRT7rPxYEdoFnZEJRg.pn...
- adam_arthur 5y ago
  Interest rates are correlated with inflation because the Fed historically raises interest rates when inflation rate is high. This is an obviously true observation and easily borne out by looking at history. Long term rates are distorted by QE right now. The market will price long term rates higher, when inflation is higher, sure. Short term rates typically set a floor on long term rates, outside of rare yield curve inversions. So not sure how your data relates. Short term rates set a floor on longer term rates, thus raising short term rates increases real rates on both fronts.
  - lottin 5y ago
    Long-term rates are not the same thing as rates in the long run. In the short run, monetary policy can create an imbalance and move the real rate of interest temporarily, but the real rate will adjust to its natural level as markets return to equilibrium, in the medium term. This is known as the Fisher hypothesis.