When inflation rises, for instance, bondholders will expect a higher nominal interest rate on new debt.
Some suggest the Swiss ought to announce a peg to the euro or engineer a negative nominal interest rate.
In 2004, Portugal's economy grew by 1%, Ireland's by almost 5%, but both had the same nominal interest rate.
Lord North particularly liked them because they carried a low nominal interest rate.
ECONOMIST: What did early 19th-century literary characters live on?
The problem for investors comes when real interest rates are negative, when the nominal interest rate won't keep up with inflation.
WSJ: Savviest Investors Pay Close Attention to 'Real' Interest Rates
Because all member states share the same nominal interest rate, slow-growing economies with lower inflation, such as Germany and Italy, have higher real interest rates than fast growers, such as Spain and Greece.
Although the interest rate is 0% to 0.1%, average deflation of -1.3% in the past 15 years means that the real interest rate (nominal interest rate 0% minus the price change of -1.3%) is a positive 1.3%.
You need to read the speech for the full explanation, but the basic idea is that higher inflation can help push down the real cost of borrowing - the real interest rate - at times when nominal interest rates can't go any lower.
My good friend and sometime mentor, Brian Wesbury, argues that the natural rate of interest is the same as the nominal GDP growth rate.
Therefore, subtracting rising rates of inflation from falling nominal interest rates results in a falling real rate of interest.
So, if we observe an economy, in which the interest rate was below the nominal growth rate and inflation was not increasing what might we conclude?
As a result, the real rate of interest nominal rates adjusted for inflation would actually rise in France.
David Woo, a currency strategist at Bank of America Merrill Lynch, says that markets are now moving on real (after inflation) interest rate differentials rather than the nominal gaps they used to heed.
Most importantly, when nominal interest rates can go no lower, a higher inflation rate corresponds directly to a lower, and more stimulating, real interest rate.
Now to be clear I think the primary driver of low interest rates across the board is the presumption of weak nominal growth and that weak growth leading the Federal Reserve to keep a low interest rate target.
It takes effect in three years, and if lawmakers opt to resume taxing dividends like interest presumably at a 39.6% rate that would push the top nominal rate on dividends above 43% in 2013.
应用推荐