, Columnist
No One Really Understands Real Interest Rates
Economists once thought they knew how borrowing costs affect the economy, but we have been proved wrong.
Back when economists thought they understood interest rates.
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When I am trying to understand the macroeconomy, I often find myself resorting to one of my favorite sayings: All propositions about real interest rates are wrong.
For starters, let’s define the real interest rate, or more properly a term series of real interest rates. If the long rate is published at say 6%, that is the nominal long rate. The real interest rate adjusts that figure for inflation, so if inflation rates are 4%, the real long rate is 6% minus 4%, or 2%.