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Questions tagged [interest-rate]

The proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. The interest rate is typically determined by a combination of market forces and monetary policy.

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33 votes
3 answers
32k views

Why aren't house prices included in CPI?

Swedens central bank recently lowered their prime rate to -0.25% from -0.10% in an effort to avoid deflation. At the same time, house and apartment prices are higher than ever, up 11% last 12 months,...
Mårten's user avatar
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29 votes
6 answers
7k views

Why is a stock market crash so bad?

Many folks speak about potential stock market crashes when central banks raise interest rates. I am not a graduate economist nor do I pretend to understand it, but I am definitely curious about what'...
Hairi's user avatar
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29 votes
4 answers
6k views

Why do people buy negative interest rate bonds?

I get that people buy long term government bonds, because of how safe it is, and if there would be a recession the government would just print more money and could pay it back. But why would anyone ...
curiousTrader's user avatar
16 votes
5 answers
3k views

How can banks pay interest to the central bank?

If the central bank is the only institution that can increase the monetary base (create both, digital and paper money), how can any institution that borrows from it (mostly banks) satisfy its interest ...
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14 votes
2 answers
4k views

Larry Summers on the causes of secular stagnation

In an influential speech on November 8, 2013 at the IMF Annual Research Conference, Larry Summers suggested that slow economic growth in the years following the 2007–2008 financial crisis might be due ...
Marko Amnell's user avatar
12 votes
7 answers
119k views

How interest rate affects currency

I am quite new to economics. I was reading about changes in interest rates and its effect on currency value. The fact is as interest rates increases, the currency value also increases and vice versa....
Mahesha999's user avatar
10 votes
2 answers
2k views

What are the causes of negative real interest rates?

I am familiar with the real interest rates equation which states that real interest rate = nominal interest rate - expected inflation rate. What I am failing to fully grasp, however, is why would ...
ThomasJ's user avatar
  • 177
9 votes
4 answers
3k views

Mortgage loans from foreign banks at lower interest rates

I had a thought - what if I live in a relatively poor country like let's say Russia and I would like to buy a house. In order to do that, I need to take a mortgage loan. In Russia however, interest ...
Orsinus's user avatar
  • 211
9 votes
2 answers
422 views

Why is 10% the necessary upper bound for a negative interest rate?

Source: p 710, Economics, 3 Ed, 2014, by N G Mankiw, M P Taylor ... In that same article, Professor Mankiw recounted a discussion with one of his graduate students at Harvard about a scheme, put ...
user avatar
9 votes
2 answers
10k views

How can nominal interest rates be negative?

It used to be (and perhaps still is) standard to teach in economics classes that the nominal interest rate cannot possibly be negative. So why have some nominal interest rates gone negative? This ...
user avatar
9 votes
4 answers
347 views

Are low interest rates dangerous?

Interest rates keep dropping. In my country in northern Europe we now have negative interest rate - banks have to pay the central bank for lending it their money. I have two questions: Why are ...
cvr's user avatar
  • 199
8 votes
3 answers
299 views

Why should I get a bond with negative interest instead of having a bank deposit account either zero interest or positive interest

I don't get why central banks apply negative interest rates. They say that buy our bond and at the maturity, it will worth less than today. What is the policy outcome of such decision? Why an investor ...
user9386's user avatar
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8 votes
2 answers
492 views

Why is the inverted yield curve a good predictor of impending economic recession?

The inverted yield curve has often been cited as a good predictor of impending economic recession. What are the reasons to explain why is it a good predictor? Is the inverted yield curve a cause or ...
curious's user avatar
  • 545
8 votes
2 answers
774 views

Consequences to lending and value of national currency from a negative interest rate and 140-year mortgages in Sweden

According to an article at Yahoo Finance, the Swedish central bank dropped its zero interest rate to -0.1 percent a couple of days ago (the article is dated to Thursday, February 12th, 2015). Now, ...
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7 votes
2 answers
400 views

Why lower the deposit rate if it is already negative?

The European Central Bank (ECB) has been lowering the interest rate on its deposit facility, first to -0.1% in June 2014, then to -0.2% in September and eventually to -0.3% in December 2015. But what ...
proskor's user avatar
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7 votes
2 answers
2k views

Taylor Rule: Relationship between interest rate and inflation

Q. According to the Taylor Rule, what should the central bank do to stabilize the economy after an increase in oil price? My points: Increase in oil prices (1970's) raises the price of production ...
James Baker's user avatar
7 votes
4 answers
2k views

In the short run, why do higher interest rate lower inflation?

A common interpretation is "Higher interest rates put less borrowing power in the hands of consumers and businesses. And when they spend less, firms are not selling everything and prices naturally ...
Kun's user avatar
  • 821
6 votes
2 answers
380 views

What is Negative Interest Rate?

I want to know about Negative Interest Rate. What it is? Is it good or bad? How it affects economy and thus general people? I have been reading these words a lot lately in business news...
Alex Jones's user avatar
6 votes
2 answers
692 views

Why could interest rates go up if Brexit happens?

I was reading this article, George Osborne says Brexit would drive up mortgage rates: George Osborne has issued a stark warning that mortgage rates will rise if Britain leaves the European Union. ...
Trajan's user avatar
  • 659
6 votes
3 answers
256 views

What is Islamic Banking?

What is "Islamic banking," and how is it similar to and different from banking as it occurs in the U.S.? I have heard Shariah Law prohibits usury, the taking of interest on loans. How do Muslim ...
Geremia's user avatar
  • 471
6 votes
3 answers
613 views

Effect of a US Federal Reserve rate hike on the Dow Jones Industrial Average

There is speculation that the Federal Reserve of the United States will raise interest rates by 0.25% in the near future. What is the expected effect on the stock market if interest rates do rise by ...
user3386109's user avatar
5 votes
5 answers
62k views

Why do Higher Interest Rates attract Foreign Investors?

I am reading the following Article at Investopedia which states Generally, higher interest rates increase the value of a given country's currency. The higher interest rates that can be earned ...
RihannaWorkWork's user avatar
5 votes
5 answers
31k views

What is the difference between present value and face value?

What is the difference between present value and face value? When I search this question on Google is says they're the same in some cases and different in others. It says they are the same when the ...
Adam Staples's user avatar
5 votes
1 answer
971 views

Cash and negative interest rates

Recently, I read an IMF blog on how the negative interest rate policy can be implemented feasibly here. I don't really understand what they are saying in this paragraph: When cash is available, ...
Tan Yong Boon's user avatar
5 votes
2 answers
7k views

Why is the money supply perfectly inelastic?

From my notes: We analyze the determination of the interest rate using a supply/demand model relating the interest rate (price of money) to the quantity of money. Since we assume: 1) no excess ...
Long Vuong's user avatar
5 votes
3 answers
1k views

Why is there a positive risk-free interest rate?

I've been told that the interest rate is the price needed to be willing to take on the risk associated with lending. This is why personal loans have higher interest rates than bank deposits, for ...
Peter's user avatar
  • 81
5 votes
3 answers
3k views

intertemporal utility function usage : calculating consumption

I have encountered this a lot in my exams and can not seem to understand how to use these functions here is an easy exemple : A consumer who will only live 2 periods receives 1000€ in the first ...
Amr El Aswar's user avatar
5 votes
2 answers
275 views

How does raising the Russian interest rate defend the Ruble from devaluation?

Raising interest rates to minimize currency devaluation is being adopted in countries like Brazil and Russia: Brazilian interest rate Russian interest rate How does raising the interest rate ...
cassioso's user avatar
  • 171
5 votes
3 answers
756 views

Are there two different meanings of the discount rate?

Today I suddenly became aware of how the term "discount rate" are frequently used in two different contexts: When people prefer to have something now rather than in the future. The reason is ...
Heisenberg's user avatar
5 votes
2 answers
3k views

Is fisher equation a definition, identity? Or is it rather a very good estimate

So let us agree that the fisher equation is $1 + i = (1 + r)(1 + \pi).$ Is it a definiton or good estimate. Intuition tells me this make so much sense and almost qualify as an equation that must hold. ...
Kun's user avatar
  • 821
5 votes
1 answer
590 views

How does the federal funds rate compare to the federal discount rate?

The federal funds rate is the interest rate charged to banks when they borrow from each other overnight in the federal funds market to satisfy their reserve requirements. This rate is influenced by ...
Tan Yong Boon's user avatar
5 votes
1 answer
189 views

How can the bond market be overvalued when the value of a bond is a function of interest rates?

I seem to have a major misconception in my understanding of the bond market and how interest rates and demand and supply influence valuation levels. I hope someone will be able to clarify. My ...
Constantin's user avatar
5 votes
4 answers
11k views

Why does the European Central Bank use the 5y5y rate to measure inflation

I cannot understand why the 5y5y swap rate measures inflation. I can see how the floating rate somewhat measures the rate of interest rates which are related to inflation. However I cannot understand ...
Trajan's user avatar
  • 659
5 votes
2 answers
1k views

Why does the Fed control interest rates?

The Fed more or less controls interest rates using open market operations, but why? Why are interests rate not controlled by supply and demand?
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5 votes
1 answer
2k views

How can the Euribor 1-week rate be less than the ECB deposit rate?

Here is my understanding: The European Central Bank (ECB) deposit rate is the interest rate the ECB gives a bank for holding a deposit with them. Currently this rate is -0.5%. Which means that it ...
Claudiu's user avatar
  • 263
5 votes
1 answer
372 views

Why does lowering interest rates transfer incomes from households to corporations?

In Financial Market, Public Policy, and the East Asian Miracle by Stiglitz and Uy (World Bank Research Observer, vol. 11, no.2, 1996), the authors state that: Lowering interest rates transfers ...
LondonRob's user avatar
  • 340
5 votes
2 answers
127 views

Is it possible for a Central Bank to escape from a deflation trap by 'hiding' information?

I'm reading this book on macroeconomics. When determining the nominal interest rate, the Central Bank has in mind its real interest rate goal. By the Fisher Equation: $i_t=r_t+\pi^{E_{CB}}_{t+1}$, ...
An old man in the sea.'s user avatar
5 votes
1 answer
398 views

Yield and interest rate?

Are they the same thing? Is yield the annualized return rate? Why when yield rise, yearly return increases but price falls?
Student's user avatar
  • 51
5 votes
1 answer
201 views

Why don't governments exploit negative interest rates more than they currently do?

At the moment many governments, such as Finland's, are able to borrow money at negative interest rates. My question is: why don't they borrow as much money as possible while interest rates are ...
bkoodaa's user avatar
  • 203
5 votes
2 answers
85 views

British inflation up again, but crisis might come. What should the BoE do?

According to the latest ONS report, inflation is rising as a consequence of the (pre/post) Brexit devaluation. This graph about the Input PPI is pretty revealing (taken from here): Yet, with the risk ...
luchonacho's user avatar
  • 8,591
5 votes
4 answers
2k views

Relationship between Real Interest Rate and Employment

The country of Kingsland is considering the introduction of a compulsory retirement saving scheme. Under this scheme all workers are required to save ten per cent of their annual wages and ...
GaramMasala's user avatar
5 votes
1 answer
79 views

Do assets without rental income streams appreciate relative to assets with rental income streams?

In his book "The Armchair Economist", economist Steve Landsburg critiques an op-ed concerning the relative value of stocks and real estate: James K. Glassman wrote a piece in The New Republic to ...
Keshav Srinivasan's user avatar
4 votes
3 answers
252 views

Is supply-caused inflation different from demand-caused inflation

I've heard numerous times that the current inflation problem is caused by supply-side issues including supply chain disruption, lower productivity from fewer people working, impacts from trade ...
Larry Freeman's user avatar
4 votes
3 answers
526 views

Loans that don't have to be paid back (only the interest)

A normal loan has to be paid back with interest. Every now and then there are interest-free loans where only the loan has to be paid back but no interest, e.g. among relatives or friends, but also as ...
Hans-Peter Stricker's user avatar
4 votes
5 answers
3k views

How to borrow at risk free rate

When learning about derivatives, we learnt about risk-free hedges and portfolios. However, one of the concepts was about borrowing and lending at the risk free rate. Now, for lending it's as simple as ...
user25028's user avatar
4 votes
5 answers
266 views

Advanced economies tend to slide down to zero interest rates and stay there. Why? [closed]

Advanced economies (e.g., Japan, USA, Europe) tend to slide down to zero interest rates and stay there. Why? Are there any theories which explain this tendency?
Kevin K's user avatar
  • 41
4 votes
1 answer
264 views

How to use Leibniz Rule of integration to find interest rate in Expanding Variety model

I'm studying growth theory from Barro/Sala-i-Martin and I stumbled upon a problem where some more advanced level of calculus is required in chapter 6 (Models with Expanding Variety: p. 294 eq. 6.18). ...
Dario's user avatar
  • 85
4 votes
3 answers
863 views

How does raising interest rates calm inflation?

My understanding is that by raising interest rates, domestic CPI indices are less likely to rise signicantly. However, raising interest rates also attracts capital inflows and can create asset bubbles....
Anthony Peter's user avatar
4 votes
2 answers
259 views

The Fed pays 1.50% interest on reserves; so why are interest rates so low?

Since 14th Dec 2017, the Federal Reserve Bank has paid 1.50% interest on excess reserves. So why do depositors' interest rates still remain so low? According to BankRate, across the US, the ...
user avatar
4 votes
1 answer
369 views

Why does falling global bond yields signal coming deflation?

This article suggests that, "Bond markets are signalling something very nasty coming down the road at us – an all encompassing, worldwide deflation. " I cannot understand why bond yields falling ...
Trajan's user avatar
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