Why Are Inflation and Real Interest Rates So Low? A Mechanism of Low and Floating Real Interest and Inflation Rates

Taiji Harashima

MPRA Paper from University Library of Munich, Germany

Abstract: Real interest and inflation rates have been very low in many industrialized countries since the Great Recession. In this paper, a mechanism of low and floating real interest and inflation rates is examined based on the concept a “Nash equilibrium of a Pareto inefficient path” and the law of motion for trend inflation. I show that, because the link between the marginal product of capital and the real interest rate is severed on this path, the real interest rate loses its anchor and therefore floats. In addition, the inflation rate floats together with the real interest rate. There are, however, upper and lower bounds of the floating rates. It is also likely that the real interest rate floats below the marginal product of capital on this path and the inflation rate floats below the target rate of inflation.

Keywords: Real interest rate; Inflation; Deflation; Marginal product of capital; Pareto inefficiency; Monetary policy; Fiscal policy; Bank behavior (search for similar items in EconPapers)
JEL-codes: E21 E22 E31 E32 E43 E52 E62 G21 (search for similar items in EconPapers)
Date: 2018-04-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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https://mpra.ub.uni-muenchen.de/84311/1/MPRA_paper_84311.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/91664/1/MPRA_paper_84311.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/91664/9/MPRA_paper_91664.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:84311

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