Real Interest rate

A real interest rate is a corrected interest rate of the rate of Inflation.

In a become work (" celebrates; Theory off Interest" , published in 1907 and republished in 1930) Irving Fisher (1867 - 1947) was the first economist has to make a clear distinction between a nominal interest rate (observed) and a real interest rate (increase in the purchasing power).

When the rates are weak (interest rate and variation of the prices the consumer), the real rate is roughly equal to the difference between the nominal rate and the rate of inflation measured by a Indice of the Prix.

Examples:

1°) Let us consider a loan of 1000 euros, during one year, at the rate of 7,1%; 1071 euros should be refunded (1000+71) in one year. Let us imagine that the rate of inflation envisaged for the year to come is weak, 2,00% to fix the ideas. Atthis rate, which costs 1000 euros today will be worth 1020 euros in one year. As 1071 equal to 1020 are increased by 5%, with the refunding of the loan (1071 euros) one will be able to buy 5% of more in one year that with 1000 euros today: the difference 7,1%-2%=5,1% is a good approximation of the increase in the purchasing power (5%).

2°) again Let us consider a loan of 1000 euros, during one year, but with an interest rate of 32% definitely higher; 1320 euros should be refunded (1000+320) in one year. Let us imagine that the rate of inflation envisaged is also higher: 10% to fix the ideas. Atthis rate, which costs 1000 euros today will be worth 1100 euros in one year. As 1320 equal to 1100 are increased by 20%, with the refunding of the loan (1320 euros) one will be able to buy 20% of more in one year that with 1000 euros today: the difference 32%-10%=22% over-estimates the increase in the purchasing power which is only of 20%.

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