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People complained about ‘negative real interest rates’ in the early 1990s, and again since 2009. Can...

People complained about ‘negative real interest rates’ in the early 1990s, and again since 2009. Can real interest rates be negative? How can that be so?

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Answer #1

Yes, it can be negative

Going as per the definition of real and nominal interest rate the negative real interest rate will be when the inflation exceeds the given nominal interest rate whereas the nominal interest rate can never be negative. Theoretically, this situation should induce people to spend more but people are actually putting more effort into saving as income effect is being more dominant. This negative real interest rate benefits the borrowers as the interest payment to the creditors will be relatively low.

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