The real interest rate is the interest rate that an investor, saver or lender receives (or expects to receive) after allowing inflation. This can be described more formally by the Fisher equation, which states that the real interest rate is about the nominal interest rate minus the inflation rate.
If, for example, an investor can lock the 5% interest rate for the coming year and anticipate a price increase of 2% , they will expect to get a real interest rate 3 % . The expected real interest rate is not a single number, as different investors have different future inflation expectations. Since the inflation rate during the loan is unknown initially, inflation volatility is a risk to lenders and borrowers.
In the case of a contract expressed in the nominal interest rate, the real interest rate is known only at the end of the loan period, based on the rate of realized inflation; this is called the ex-post real interest rate. Since the introduction of inflation index bonds, ex-ante real interest rates have been observed.
Video Real interest rate
Risiko
In economics and finance, an individual who lends money for repayment at the next time point expects to be compensated for the time value of money, or does not use the money when lent. In addition, they want to be compensated with the risk of having less purchasing power when the loan is repaid. These risks are systematic risk, regulatory risk, and inflation risk. The first includes the possibility that the borrower will fail or can not afford to pay in accordance with the agreed terms, or the guarantee that supports the loan will prove less valuable than expected. The second includes taxation and changes in the law that will prevent the creditor from collecting the loan or having to pay more in taxes on the amount paid than originally anticipated. The third takes into account that the money paid may not have that much purchasing power from the lender's perspective because of the money originally loaned, that is inflation, and may include fluctuations in the value of the currency involved.
- The nominal interest rate includes all three risk factors, plus the time value of the money itself.
- Real interest rates only include systematic and regulatory risks and are intended to measure the time value of money.
The "real interest rate" in the economy is often regarded as the rate of return of risk free investments, such as US debt securities, minus inflation indices, such as the rate of change of the CPI or GDP deflator.
Fisher's Equation
Hubungan antara tingkat bunga riil dan nominal dan tingkat inflasi yang diharapkan diberikan oleh persamaan Fisher
dimana
- i = suku bunga nominal;
- r = suku bunga riil;
- = tingkat inflasi yang diharapkan.
For example, if someone borrows $ 1000 for a year on 10% , and receives $ 1100 back at the end of the year, this represents 10% increase in purchasing power if the average price of the goods and services he/she buys does not change from what they did earlier in the year. However, if the price of food, clothing, housing, and other things he wants to buy has increased 25% during this period, he has actually experienced a real loss of approximately 15% in its purchasing power. (Note that the approach here is rather crude: since 1.1/1.25 = 0.88 = 1 - 0.12, the actual loss of purchasing power is 12% .
Variations in inflation
The inflation rate will not be known before. People often base their expectations on future inflation on the average inflation rate in the past, but this is a mistake. The ex-post real interest rate may change to be very different from the expected real interest rate (ex-ante interest rate) previously. Borrowers expect to pay back the cheaper money in the future, while lenders hope to raise more expensive money. When inflation and currency risk are underestimated by the lender, then they will experience a net reduction in purchasing power.
Increased complexity for bonds issued for the long term, where the average inflation rate over the loan term can be subject to much uncertainty. In response to this, many governments have issued real bonds of return, also known as inflation index bonds, where the principal and coupon increases each year with inflation, with the result that the interest rate on bonds is close to the real interest rate. (For example, a three-month index pause from TIPS can result in divergence of 0.042% of real interest rates, according to research by Grishchenko and Huang.) In the US Treasury Inflation Protected Securities (TIPS) US Treasury.
The expected real interest rate may vary from year to year. The real interest rate on short-term loans is strongly influenced by the central bank's monetary policy. Real interest rates on long-term bonds tend to be more driven by markets, and in recent decades, with global financial markets, real interest rates in industrialized countries have become increasingly correlated. Real interest rates have been low by historical standards since 2000, due to a combination of factors, including relatively weak demand for loans by companies, plus strong savings in new industrialized countries in Asia. The latter has offset the demand for large loans by the US Federal Government, which may have put more upward pressure on the real interest rate.
Associated is the concept of "risk-return", which is the rate of return minus the risks measured against the safest (least risky) investments available. So if the loan is made at 15% with the inflation rate 5% and 10% in the risk associated with the default or payment issue, then the rate of return adjusted for investment risk is 0% .
Maps Real interest rate
The importance in economic theory
The amount of physical investment - especially the purchase of new machinery and other productive capacity - that the company is involved depends on the real interest rate, since such purchases usually have to be financed by issuing new bonds. If the real interest rate is high, the cost of borrowing may exceed the actual physical return of some potentially purchased machine (in the form of output produced); in this case the machines will not be purchased. The lower real interest rate will make it profitable to borrow to finance the purchase of a large number of machines.
Real interest rates are used in various economic theories to explain phenomena such as capital flight, business cycles, and economic bubbles. When the real interest rate is high, that is, the demand for credit is high, then the money will, all other things be equal, moving from consumption to savings. Conversely, when the real interest rate is low, demand will move from savings to investment and consumption. Different economic theories, beginning with the work of Knut Wicksell have different explanations about the effect of rising and falling real interest rates. Thus, international capital moves into markets that offer real interest rates higher than markets that offer low or negative real interest rates that fuel speculation in equities, plantations, and exchange rates.
Real federal funds rate
In setting monetary policy, the US Federal Reserve (and other central banks) set interest rates they lend to banks. This is the federal funds rate. By setting these levels low, they can encourage lending and thus economic activity; or vice versa by raising tariffs. As with any interest rate, there is a real and nominal value defined as described above. Furthermore, there is a concept called "federal equilibrium federal funds" (r *, or "r-star"), or the so-called "natural interest rate" or "neutral real rate", which is "the actual level of federal funds , if allowed to last for several years, it will place economic activity on its potential and keep inflation low and stable. "There are various methods used to estimate this amount, using tools such as the Taylor Rule. Maybe this level is negative.
Real negative interest rate
Tingkat bunga riil yang dipecahkan dari persamaan Fisher adalah
Jika ada suku bunga riil negatif, itu artinya tingkat inflasi lebih besar dari tingkat bunga nominal. Jika tingkat dana Federal 2% dan tingkat inflasi 10% , maka peminjam akan memperoleh 7,27% dari setiap dolar yang dipinjam per tahun.
Negative real interest rates are an important factor in government fiscal policy. Since 2010, the US Treasury has obtained negative real interest rates on government debt, which means the rate of inflation is greater than the interest rate paid on debt. Such low rates, surpassed by the rate of inflation, occur when the market believes that there is no alternative with a low enough risk, or when popular institutional investments such as insurance, pension, or bond, money market and balanced mutual funds are required or to invest a substantial amount in Treasury securities to hedge against risk. Lawrence Summers stated that at such low rates, government debt loans save taxpayer money, and increase creditworthiness. In the late 1940s to early 1970s, the United States and Britain reduced their debt burden by approximately 30% to 40% of GDP per decade by taking advantage of real interest rate negative rates , but there is no guarantee that the level of government debt will remain low. Between 1946 and 1974, the debt-to-GDP ratio fell from 121% to 32% even though there was a surplus in just eight years that was much smaller than the deficit.
See also
- Real versus nominal (economic) value
- Inflation
- Deflation
- IS-LM model
- Macroeconomics
- Financial oppression
- Natural interest rate
References
External links
- "Equilibrium Real Interest Rate," by Roger Ferguson, 2004.
- About the difference between real returns and nominal bonds, by Peter Spiro, 2004.
- Real interest rates by country through Quandl
Source of the article : Wikipedia
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