The Economic Perspective: “Determinants of Real Interest Rates”

This is Mary Walden with economist MW, welcoming you to the economic perspective.  Today’s program looks at determinants of real interest rates.  Mike, like most disciplines, economists have their own terms that are used as shortcuts to broad concepts.   One of the terms is the word “real.”  What does “real” mean when applied to interest rates?

  • Means have removed the effect of inflation
  • Think of inflation as a tide that raises all levels
  • If inflation is, say 4%, means – on average – all prices, including wages, rise by 4% annually
  • If they don’t rise that amount, then losing
  • So the real interest rate is the observed rate minus inflation
  • So changes in real interest rate are what really deserve to be followed
  • Research shows demography has a big impact on real rates
  • Middle age folks are biggest savers – so higher their proportion, then get lower real rates
  • I’m MW

Mary:  And I’m Mary Walden for the Economic Perspective, an NC State Extension program from the Department of Agricultural and Resource Economics.