Is that phrase ("is going to be to wipe out the real value of nominal debt") a euphemism for bail-out? Please help me read between the lines. TIA!
https://finance.yahoo.com/news/roubini-says-dr-realist-warning-141111449.html
The fact is that nominal interest rates are near zero but the rate of inflation pushes real interest rates below zero, making credit effectively pay people to have it. Cheap credit makes people take more risks and blows asset price bubbles bigger
is this statment correct or not?
So, if I go on moneysmart.gov.au and I try to calculate home load repayments it calculates it based off 2.35%. Is this value the nominal or real interest rate?
Cheers
I'm given cost in terms of years,
(I.E. 12 people, 120k yearly with 5% increase per year) but am told my interest rate on a quarterly basis.
(I.E. 13% per quarter compounded monthly) How can I finish my problem?
Basically, if possible, how much yearly effective interest is 13% per quarter compounded monthly? Pls & thx.
Is there any good trusted source I can use for my research? Thanks in advance!
Sorry if this question is too trivial, I couldn't find about it on the Internet. I seek not only answer, but explanation why it's, say, nominal rather than real or vice versa.
https://math.stackexchange.com/questions/3797117/yield-rate-as-a-nominal-interest-rate
question on yield rate, it's an example given in finan but I don't understnad
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A long tradition in macroeconomics has proposed the existence of a Zero Lower Bound (ZLB) on nominal interest rates. Intuitively, as cash offers a nominal return of zero percent, agents should not be willing to pay others to keep their money. However, recent experience from the aftermath of the Great Recession has shown that negative nominal interest rates (NNIR) are possible: the central banks of several advanced economies have used them as a policy tool.1 The Euro Area, Switzerland, Sweden, Denmark, and Japan all implemented NNIR at some point between 2014 and 2018 (Figure 1). Even if one abstracts from the Great Recession, the global, secular decline in interest rates increases the likelihood of recessionary episodes where nominal rates hit zero. In this environment, understanding whether negative rates can stimulate the economy is of great importance to academics and policy makers.
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Two empirical regularities have been observed across countries setting NNIR: retail deposit rates have remained at zero (failing to follow the policy rate into negative territory), and lending rates have mostly declined. Given these facts, it appears that negative rates can partially stimulate the economy through the transmission mechanisms associated with the lending rate. However, commercial bank profitability could be eroded by a decline in the spread between lending and deposit rates. Bank profitability has therefore emerged as one of the most pressing concerns when adopting NNIR
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There is a growing empirical literature that studies the effects of NNIR on commercial banks. Ampudia and Van den Heuvel (2017) study the effect of negative rates on banks’ stock prices. They try to get at causal identification by using high-frequency techniques, and find that an unexpected decrease in the policy rate has particularly negative effects on banks’ stock prices during the negative rate period. Borio et al. (2017) discuss the influence of monetary policy on bank profitability, in the context of very low (but not yet negative) rates. They find that low rates and an unusually flat term structure erode bank profitability. Claessens et al. (2017) find that a one percentage point interest rate decline implies an 8 basis points lower net interest margin in normal times, but this effect increases to 20 basis points at low rates. More recent papers, like Basten and Mariathasan (2018), Demiralp et al. (2017), Eisenschmidt and Smets (2018), and Lopez et al. (2018), study the effects of
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The Pure Expectations Hypothesis has long served as the preeminent benchmark model of the relationship between the yields on bonds of different maturities. When coupled with rational expectations, however, most empirical renderings of the model fail miserably.
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This paper explores the possibility that failure to account for changes in market participants' assessment of the monetary policy regime, including changes in the target rate of inflation and the response to inflation and output, may explain much of the failure of the PEH.
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Estimating explicit expectations for changing monetary policy regimes in conjunction with the PEH model goes a long way toward rescuing the PEH model.
Reading 16, EOC 18
Excerpt from podcast (BNP Paribas):
> Moving to interest rates now. Why are some of them negative?
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> In explaining the causes of negative interest rates, it is useful to look at the neutral interest rate. The real neutral (or natural) rate of interest is the rate at which GDP is at its potential and hence inflation is stable provided there are no shocks to demand (which would hit realised GDP) and supply (which would hit potential GDP). To put it differently, it’s the interest rate at which the economy is in equilibrium.
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> "Conceptually one of the most important variables in modern macroeconomics, r* is the real rate of interest that brings output into line with its potential or natural level in the absence of transitory shocks (in the case of semi-structural models) or nominal adjustment frictions (in the case of DSGE models). r* thus closes the output gap and stabilises inflation, either eventually or concomitantly depending on the type of model. Numerous factors, such as demographics or technological progress in the long run, or changes in risk aversion in the short run, affect r*". (ECB)
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> Why is this neutral rate the logical starting point?
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> First, it reminds us that the neutral rate can rise or decline for structural reasons, which have little or nothing to do with monetary policy. This is an important point. It means that a central bank is not the only cause and perhaps not even the major reason why the rates are low.
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> Second, the neutral rate anchors the official rate of interest set by the central bank: the policy rate will be set having in mind the neutral rate. This anchoring should not be interpreted in a strict sense: estimating the neutral rate of interest in real time is fraught with issues, a bit like real-time estimates of the output. Hence the neutral rate is more a reference, with a confidence band around it, rather than a precise estimate.
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> If the official rate is higher than the neutral rate, policy is not in an accommodating stance, even though the policy rate can be low.
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> "Central banks can influence the short-term real interest rate relative to its equilibrium value by changing the short-term nominal interest rates, thereby influencing the real economy and inflation developments. If the key interest rate less the expected inflation rate is b
... keep reading on reddit ➡The Bank of England base rate is 0.75%, the Sterling inflation rate is 2.3%. If someone's money is in a bank account at a nominal interest rate that is presumably less than 0.75%, are they losing money each year? Assuming there exists some perfectly stable market for a durable good whose value is representative of the basket used for inflation, surely it would be worth taking all of my money out of the bank account and investing it in the durable good since its value will increase by 2% nominally rather than 0.75%? I have confused myself about how this works. Thanks in advance!
