k10.txt - as the definition of the real interest rate where r = real interest rate i = nominal interest rate pi = inflation(Ex ante is Latin for before

k10.txt - as the definition of the real interest rate where...

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as the definition of the real interest rate, where r = real interest rate i = nominal interest rate pi = inflation (Ex ante is Latin for before the fact, and means the value expected in advance. Ex post is Latin for after the fact, and means what actually happens in the end what one knows with hindsight.) Eqivalently, i = r + pi. The Bottom Line. Putting everything together, let me summarize what central banks can and can t do in the short run and in the long run: In the short run, central banks can control the nominal interest rate i, and through it the real interest rate r, but can t control inflation pi. Through their control of the real interest rate in the short run, central banks can affect a large number of real variables in the short run. In the long run, central banks can control inflation pi, and through it the nominal interest rate i, but can t control the real interest rate r. Because central banks can t control the real interest rate in the long run, they can t control any crucial real variable in the long run. (The biggest exception to the rule that central banks cannot affect real variables in the long run is that inflation and nominal interest rates influence real money balances.) Update April 11, 2018: Lewis Lehe asks on Twitter: Lewis: If they don
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  • Fall '15
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