# Economics of Banking

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We observe very large and rapid declines in the policy rate (the very short rate) in late 2008 and early 2009. Considering the US, the UK, and Japan, did long rates fall as much around that time or less or more? In late 2008, many developed economies where in or close to recession, with growth slowing noticeably in the emerging economies. These events prompted an easing of monetary policy and expansionary fiscal measures in many countries (Reserve Bank of Australia, 2008). The policy rate is the target 'cash rate' set by central banks. This is also the market interest rate on overnight funds, which is used as an instrument for monetary policy (Mishkin, 2013). The long rate is also known as Government securities, or ten-year…show more content…
The nominal interest rate is the rate quoted that does not consider inflation. The rate that takes inflation into account is known as the real interest rate (Mishkin, 2013). The real interest rate is more accurately defined from the Fisher equation. The Fisher equation states that the nominal interest rate i equals the real interest rate r plus the expected rate of inflation π^e: i = r + π^e Rearranging terms, the real interest rate equals the nominal interest rate minus the expected inflation rate: r = i - π^e From graph 4.10 the data is as follows: Expected inflation Country US 2.25% UK 2.75% Japan 1.25% The nominal rate for 2013: Nominal rates Country 2013 US 2.75% UK 4.00% Japan 2.50% (Trading Economics. Retrieved from http://www.tradingeconomics.com) Based on the above data and utilising the formula r = i - π^e, the following estimates of the real long rate for the US, UK and Japan for June this year. Estimated real long rate Country 2014 US 0.50% UK 1.25% Japan 1.25% With the help of the internet for the most recent data for the nominal 10-year bond yield also estimate the real long rates for Brazil, China and India. By using the Fisher equation above, r = i - π^e, the following estimate can be made for the real long rates for