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The CPI stands for a Consumer Price Index. As in the price of things that are consumed (at a particular moment in time). Real estate prices are not the price of something consumed because they contain the value of current housing consumption but also the capitalized value of future housing consumption. As such, including house prices would make the CPI a ...


12

You are assuming that the supply of deposits is zero when the price (the rate) is zero but it definitely is not. There are several reasons for this. While you can withdraw cash from the bank it is unwieldy, costly, and unsafe to have large amounts of cash lying around. Therefore, if there were no other alternatives, heavy spenders would still want some ...


11

Actually they're saying that, when cash is available, people need not to deposit their money into the bank, and hence is "guaranteed" (not taking into account risks associated with holding on to cash, like fire or getting stolen) a 0% interest rate. Having cash, therefore, means that if the deposit rate goes into the negative territory (you're charged to ...


9

There was only one reason to ever think that nominal interest rates couldn't go negative, which is that the nominal return on both forms of base money (electronic reserves, and paper currency) had a floor of zero -- and investors wouldn't accept a below-zero nominal return when they could get a higher one by holding base money. But for electronic reserves, ...


7

You're right to ask; the sentence you bolded is unclear in its wording. The effect of randomly invalidating 1/10th of the currency outstanding in one year is that in expectation, cash would have an interest rate of -10%. So when Mankiw says the policy "might enable central banks to set negative interest rates provided the rate was less than 10%", he means "...


7

Assuming your home is safe, would you keep your money in a bank that only gave 96% of it back? (-4% interest rate) What if your home has mice which eat exactly 10% of your money? Would you then keep your money in the bank that only returns 96%? And finally, what if every bill has a 10% chance of being eaten? This means that in expected value you lose 10% ...


7

An interest rate is the percentage that is paid for borrowing money, and that one gets for lending. If it is negative that means you have to pay so that someone takes your money for a while. So how could that even work, why should anyone lend money under such conditions? Normal savers would just keep their money with them, even if that bears the risk that it ...


7

What would happen in the event of a "Leave" vote in the referendum? Well, the pound would quickly fall in value against its major trading partners - and some falls have already happened as the "Leave" vote appears to increase in probability. That makes imports more expensive, which is directly inflationary. Which pushes the Bank of England (the UK's Central ...


6

There is some concern about the interest rates (currently at -0.5%) fueling a housing bubble in Sweden. This article at Fidelity states: In a bid to track the ECB, Sweden has cut its interest rate below zero, a radical move that involves charging banks to hold some types of deposits with the aim of encouraging them to lend. Similar trends have ...


6

Suppose the face value of a bond is $M$ and its interest rate is $\tau$. This means it will pay $\tau \cdot M$ interest every year (other periods are also possible) and at the end of its run (its maturity) it will also repay the face value $M$. Government bonds are usually sold in auctions. Whatever ends up being the market price is considered to be the ...


6

Handing out the principal amount of debt gradually, in increments, is standard practice in investment loans extended by a bank to a corporation. The rationale is clear : the corporation wants to make an investment, say a new factory. The whole plan is laid out and the cash flows of the pre-operational, construction period are also detailed, based on ...


6

Recently I read an interesting paper on this subject from the Bank for International Settlements: Juselius, Mikael and Takats, Elod, Can Demography Affect Inflation and Monetary Policy? (February 2015). BIS Working Paper No. 485. Available at SSRN: http://ssrn.com/abstract=2562443 The abstract: Several countries are concurrently experiencing ...


6

To answer the first part, it's an "annualised" interest rate convention - like all other quoted interest rates. For example, if a one-month money market rates are unchanged at 4%, you would receive approximately 4% in interest after a year, or roughly 1/3% a month. (Note that those numbers are ignoring compounding, further details below.) As for the ...


6

A private person will almost never have an access to borrowing at risk free rate. However, governments such as Germany or Switzerland can borrow at essentially for all practical purposes at risk free rate by issuing government bonds. As a private person you might get access to risk free loan if you are rich enough to be able to negotiate the rate with bank ...


5

You anticipate the answer when you ask: This question can be easily answered if there were any way in which new money can leave the central bank without being paid back. Are there such transactions I don't know about? Indeed, there is always a way that money leaves the central bank without being paid back: the central bank does something with its net ...


5

This is the two-period budget constraint: C1 + C2/(1+r) = Y1 + Y2/(1+r) Derivation is straightforward. On the LHS, you have the present value of consumption (considered during period 1), and on the RHS you have the present value of income. Intuitively, think about 1/(1+r) on the LHS as the price ratio between Good 1 and Good 2. Now you can solve the u-...


5

It's true that in response to an oil shock, the Taylor rule could recommend increasing the interest rate to reduce inflation. In practice it would mean that as interest increases, consumption falls. This could be from less credit financed spending, or because the opportunity cost of holding money has increased, therefore people invest more in illiquid assets ...


5

It makes little sense to me either, but here are some possible reasons for buying a bond with negative interest rates rather than depositing the same amount in a bank: The deposit-taking bank may go bankrupt during the lifetime of the bond and your deposit would be too large to be guaranteed, with the cost of default insurance being higher than the the ...


5

@Henry gives a good answer with lots of interesting reasons. However, there are lots macro-model setting where the demand for risk free assets is positive, even when the interest on savings is negative. Essentially, because risk is unpleasant and we don't have any good alternative technology to the market for risk-less assets to move our savings through ...


5

Great set of questions! Here are some ideas: What it is?: An investment that pays the investor a negative interest rate is one where he or she pays X money upfront, and receives $X\cdot(1+r)$ later on, where $X\cdot(1+r)<X$, because $r<0$, that is, he or she receives less money than she put in. A Negative Interest Rate policy is a decision by a ...


5

Bond yields falling from their current near-zero position will place them in negative yield territory. Negative bond yields are deflationary by definition. Paragraph 3, sentence 5 of the article says: With Bank Rate already close to the floor, and some UK bond yields now in negative territory... [emphasis added] To understand why negative bond yields ...


5

The interest rate is (1) the price needed to take on risk and (2) the price needed to delay consumption. The reason there is a positive risk free rate, even though there is no risk, is because of the time preference typical of any economic agent. It is preferable to consume today, than to consume tomorrow. To put off consumption today and invest in the risk ...


5

There is a fair amount of ambiguity to this question. The first question is: what is the yield curve? A fixed income investor may refer to the yields across all maturities as the yield curve, while economists pick the difference in yields between two arbitrary maturities as the yield curve. Which two? Typical choices are the spread between the 2-year and 10-...


5

Under most capitalism-like systems, companies are funded in two ways. One is debt with positive interest, the other is by selling equity to shareholders. If you could effectively prohibit debt, then companies could conceivably adapt by switching to a 100% equity model, in which individuals would shift all of their interest-bearing savings into shares. ...


5

You ask: "what would happen if every country in the world were to make a law that would make it illegal to lend money at a positive rate of interest?" We know what happens, because we've already seen this happen in some places. People reinvent lending for positive interest in some other guise that keeps the word of the law, but breaks the spirit of it. For ...


4

I wanted to leave this as a comment but I dont have enough rep yet so I am putting this here even though it is not an answer. The problem with the lack of investiments is due to the fact that most of the companies who have a huge part of the consumers demand are technology based companies, I am talking in this case about social networks, etc... And these ...


4

The fisher hypothesis, as well as related aspects of the neutrality of money hypothesis, are typically argued only to operate in the long-run, with changes in money supply having short-run effects which are modeled with monetary disequilibrium theories. So, a nation sells bonds in exchange for liquid assets denominated in its currency and then holds onto ...


4

The Rate they are talking about is the rate at which the central bank lends money to other private/public banks. It has nothing to with the rate at which the central bank prints money (Infact this is the first time I have seen somebody interpreting the central bank lending rate as the rate at which the central bank prints money). By increasing the rate of ...


4

In banking, Rule 0 always applies: The central bank can do whatever it wants. There is no reason per se, why the nominal interest rate can't be < 0 for short periods, and there have been several incidents across Europe in the last few years, where this has impacted consumer loans. The typical mechanism was that a bank linked a loan's interest rate to the ...


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