Nominal Interest Rate - Definition
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Nominal interest rate Financial panics, the seasonality of thenominal interest rate, and the founding of the Fed, Miron, J. A. (1986). The American Economic Review,76(1), 125-140. In 1914, after the Fed was founded, there was a decline in the financial panics and the size of the sharp movements in nominal interest rates. It is established by this paper that the Fed, caused a decline in the frequency of panics by carrying out the seasonal open market policy. Since theres an anticipation of seasonal movements and there are real effects by financial panics, it is shown by the result that an anticipated monetary policy had real effects on the company copyright 1986 by American Economic Association. The instability of fixed exchange rate systems when raising thenominal interest rateis costly, Bensaid, B., & Jeanne, O. (1997). European Economic Review,41(8), 1461-1478. This paper relates to a vicious circle which might occur in a situation where a government attempts to defend its currency by increasing the nominal interest in a fixed exchange rate system. A stylized model is presented that works on raising the nominal interest rate to maintain the parity, but at the same time, expensive for the government. Those speculating are aware that this cost results giving in incentives for the government to stop defending the parity, and in turn reinforces the speculation against the currency. We relate that this mechanism can create self-fulfilling currency crises; the result then relies on the level of sacrifice that the government is ready to endure and the evolution of domestic economic conditions. Optimal and simple monetary policy rules with zero floor o thenominal interest rate, Nakov, A. (2005). Recently, the treatments of the issue of a zero floor on nominal interest rates have been dependent on some important methodological limitations. The assumption of perfect foresight or the bringing in of the zero lower bound as an initial condition is included, or a constraint on the variance of the interest rate, order than a periodic binding non-negativity limitation. The issues mentioned are addressed by this paper and offering a world-wide solution to a dynamic stochastic sticky price that is dynamic in addition to an occasional explicit and binding non-negativity limitations on the nominal interest rate. Monetary policy when the nominal short-term interest rate is zero, Clouse, J., Henderson, D., Orphanides, A., Small, D. H., & Tinsley, P. A. (2003).topics in Macroeconomics,3(1). When theres low inflation, theres a possibility that Federal reserve faces that enough monetary stimulus may not have been provided although it had pushed the short term nominal interest rate to a lower bound of zero. If the nominal Treasury bill rate was lowered to zero, theres a consideration on this paper that additional open market transactions of treasury bill could result in aggregate demand through raise in the monetary base. Increasing liquidity for financial intermediaries and household could be as a result of such stipulated actions. And this can be done by affecting future path expectations of short term interest rates, asset, and inflation prices, by distributional effects or bank lending stipulation through the credit channel. Real indeterminacy in monetary models withnominal interest ratedistortions, Carlstrom, C. T., & Fuerst, T. S. (2001).Review of Economic Dynamics,4(4), 767-789. In a standard flexible-price monetary model, this paper demonstrates that there exists real indeterminacy whenever the nominal interest rate becomes too close with both current or forecasted inflation. An aggressive response to lagged inflation will endure determinacy. To a wide range of calibration, the conclusions arrived at are robust and a commercial environment that permits endogenous velocity. The inclusion of investment spending in the transaction constraint affects the result Journal of Economic LiteratureClassification Numbers: E4, E5. Exchange-rate policy and the zero bound on nominal interest rates, Coenen, G., & Wieland, V. W. (2004). American Economic Review,94(2), 80-84. The effectiveness of monetary policy in a severe recession and deflation is what this paper studies and this is when nominal interest rates are bounded at zero. Two alternative proposals are compared for enhancing the effect of the zero bound: the peg of an exchange rate and price level targeting. This quantitative comparison is conducted in an empirical macro-econometric model of Japan, the euro area and the United States. Also, a stylized micro-founded two-country model is used to check our qualitative findings. It is discovered that most proposals succeed in generating inflationary expectations and perform well under monetary policy credibility. The early history of the real/nominal interest raterelationship, Humphrey, T. M. (1983). For over 240 years ago, there was a proposition that the actual rate of interest is the same as the nominal rate minus the expected rate of inflation. Tax effects, price expectations and the nominal rate of interest, Carr, J., Pesando, J. E., & Smith, L. B. (1976). Economic Inquiry,14(2), 259-269. The investigation of the relationship between expectations in price, the nominal rate of interest in Canada and income taxes is what this paper investigates. Primarily, our approach was to use the rational expectations hypothesis to create a synthetic price expectation series and the use the application of this series to four models to determine the nominal rate of interest: the CarrSmith model, the YoheKarnovsky model, the FeldsteinEckstein model, and the JenkinsLim model. There is no conclusion by the analysis concerning the Darby hypothesis that considerations of income tax will result in the nominal rate of interest to go higher by more than the increase in the rate of expected inflation. Price-level determinacy, lower bounds on thenominal interest rate, and liquidity traps, Alstadheim, R., & Henderson, D. W. (2006). Contributions in Macroeconomics,6(1), 1-27. Standard monetary policy rules are studied with the rate of inflation and either money supply or interest-rate instruments using a flexible-price and a perfect foresight model. The focus is mainly on interest rate rules. It is noticed that the result for rules is analogous. There usually exist a specific target equilibrium. Low target equilibria (BTE) exists with inflation that is less than target and constant or asymptotically approaching and then getting to a below-target value. It is not necessary to have liquidity traps nor sufficient for BTE. Money and thenominal interest ratein an inflationary economy: an empirical test, Blejer, M. I. (1978). Journal of political Economy,86(3), 529-534. Money supply changes are supposed to influence the nominal interest rates in opposite directions: the credit effects and liquidity result into reducing the rate, while in factory expectations are higher and work in the opposite direction. It is suggested by theoretical studies that credit effect and liquidity might initially dominate; they eventually lead to offset by the effect of the expectation. It is more apparent in countries that experience mild inflation. For example, a country like Argentina, which indicate that the effect of the expectation is dominant and that changes in the monetary rate disequilibrium were lead to the nominal interest rate. Nominal interest rateeffects on real consumer expenditure, Wilcox, J. A. (1990). Business Economics, 31-37. Consumer expenditures are assumed to be influenced by interest rates. Practically, the effect of expected, real interest rate and after-tax is the focus of econometric models. Although the empirical evidence that is shown indicates that interest rates are critically influenced by consumption, although their operations are always through not real, nominal interest rates. Furthermore, the effects of these nominal interest rates are not limited to spending for durables but also have essential effects on nondurable expenses and services. Optimal discretionary monetary policy in a micro-founded model with a zero lower bound onnominal interest rate, Ngo, P. V. (2014). Journal of Economic Dynamics and control,45, 44-65. Under the zero lower bound, optimal discretionary monetary policy on the nominal interest rate (ZLB) is researched in this paper. This is applicable in cases of a distorted steady state which is as a result of monopoly and taxation. Using a global method and Solving a fully nonlinear micro-founded (FNL) model, it is discovered that the central bank in a more disorganized economy would reduce the rates of interest seriously under a specific adverse demand shock. This happens because both nominal rate and inflation are higher on average which makes the ZLB less likely to bind and causes the economy to leave the ZLB sooner.