30 votes

Why aren't house prices included in CPI?

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 ...
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  • 15.9k
23 votes
Accepted

Why is a stock market crash so bad?

Why FED/ECB/whatever raising interest rates is bad for stock markets? (I am aware that this is an assumption - my information could be wrong) This is because interest rates critically determine price ...
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  • 43.6k
18 votes

Why is a stock market crash so bad?

The previous answer is amazing from economist technical viewpoint, but misses two important points of why a stock market crash is bad: "Stock market" is an abstraction. There is no "...
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  • 688
14 votes
Accepted

Why lower the deposit rate if it is already negative?

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 ...
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  • 15.9k
14 votes

Mortgage loans from foreign banks at lower interest rates

The low interest rate will be in a different currency. If your domestic currency falls in value, the value of the mortgage in terms of the domestic currency goes up. Entities borrowing in a foreign ...
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14 votes

Mortgage loans from foreign banks at lower interest rates

What does stop me from taking a loan from a bank in a rich EU-country to build or buy a house in a poor country like Russia, while having EU-level interest rates below 3% instead of the Russian 15%? ...
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  • 260
11 votes
Accepted

Cash and negative interest rates

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, ...
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  • 2,764
10 votes

How can nominal interest rates be negative?

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 ...
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10 votes

How interest rate affects currency

Its important to keep in mind that the exchange rate is a "price for currency" and just like any other price it is determined by supply and demand. The main question now is what determines ...
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  • 5,434
10 votes

What are the causes of negative real interest rates?

If there is inflation, what is your alternative? If you do not lend, your money loses even more of its value. A numerical example: If inflation is 5% and you can lend at 2% nominal interest rate, you ...
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  • 26.7k
9 votes

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

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 ...
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  • 26.7k
9 votes
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Taylor Rule: Relationship between interest rate and inflation

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. ...
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  • 5,434
8 votes
Accepted

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

An interest rate is the return that a lender earns on money lent to someone else. If the interest rate is higher then it makes lending money more attractive because the return is higher. In ...
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  • 16.6k
8 votes

Why is the money supply perfectly inelastic?

The Fed controls the nominal money supply as they are the only ones who can add or remove money from the economy by printing it. Real money supply is only affected by increases or decreases in ...
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8 votes

How to borrow at risk free rate

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 ...
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  • 43.6k
8 votes

Why do people buy negative interest rate bonds?

There are several reasons why it makes still sense. Nominal negative return does not mean that real return is negative. There is a difference between nominal interest rates and real interest rates ...
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  • 43.6k
7 votes
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Consequences to lending and value of national currency from a negative interest rate and 140-year mortgages in Sweden

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 ...
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7 votes

How can banks pay interest to the central bank?

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 ...
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7 votes
Accepted

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

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 ...
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7 votes

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

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 ...
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  • 4,694
7 votes

What is Negative Interest Rate?

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 ...
7 votes

Why is there a positive risk-free interest rate?

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 ...
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  • 1,057
7 votes

What are the causes of negative real interest rates?

The same reason that oversupply leads to falling prices in any other market. There is a huge amount of money out there, and a lack of good returns with adequate levels of safety, so money is cheap. ...
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  • 368
6 votes
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What is the difference between present value and face value?

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 ...
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  • 26.7k
6 votes
Accepted

Is the loan principal ever delivered in pieces over time?

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 ...
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6 votes

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

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 ...
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  • 419
6 votes

Why do Higher Interest Rates attract Foreign Investors?

The answer lies in this part of your posted quote: "The higher interest rates that can be earned tend to attract foreign investment, increasing the demand for and value of the home country's ...
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  • 169
6 votes
Accepted

Why could interest rates go up if Brexit happens?

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" ...
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