Krugman’s argument is that by raising the inflation target, nominal interest rates would be higher. This, he proposes, would give central banks more room to reduce interest rates to stimulate the economy.
Unfortunately, Prof. Krugman has made an error that should make him blush. It is the real interest rate, not the nominal interest rate, that affects most economic activity Continue Reading →
Introduction Economists take it for granted that everyone knows the definition of the real interest rate: r = i – p where i is the nominal interest rate and p Continue Reading →
So, once again, it’s time to remind the world that the interest rate that counts is the real interest rate (corrected for inflation) in your local currency. People who don’t live in Brazil are automatically exposed to exchange rate risk when they send part of their wealth off to Rio. Continue Reading →
Blanchard’s argument is that by raising the inflation target, nominal interest rates would be higher. This, he proposes, would give central banks more room to reduce interest rates to stimulate the economy. Unfortunately, Prof. Blanchard has made an error that should make him blush. Continue Reading →