Ajayshahblog.blogspot.com
About ajayshahblog.blogspot.com
Economists are very clear that the interest rate that matters is one that is expressed in real terms. If I borrow Rs.100, and am obligated to pay back Rs.110 a year from now, the true cost of borrowing that weighs in my mind is not 10%; it is lower to the extent that I expect the rupee will be worth less owing to inflation, a year from now. Hence, what matters is the real rate: the difference between the nominal interest rate, and expected inflation over that identical horizon. This perspective matters greatly for thinking about monetary policy. What matters is not the short-term interest rate which we apparently see on the money market; what matters is this rate after subtracting out expected inflation over the same time horizon
