Real interest rate

• The first policy problem concerns developed economies and some developing economies that have low levels of Fx debt or that don’t depend on commodity exports or tourism.

• This is a monetary policy issue. Just how long and how deep should easing be and should nominal interest rates turn to negative? The U.S. won’t resort to negative nominal rates.

• The second problem is a balance of payments issue. Countries where capital flights abound and reserves are low or exports leave a lot to be desired or tourism falters face that problem.

• Overseas investors continue selling – $1.05 billion, and the impact of the asset ratio change is non-existent because net reserves fell by $1.97 billion in one week.

• In such economies the real rate of interest is of prime importance. Monetization wouldn’t necessarily trigger demand. But negative real interest rates can distort equilibrium.

• The ex post real rate has ordinarily been below the ex ante rate. This means inflation has consistently been above expectations. The 3-month real rate is at minus 1.3.

• Faced with the second type of (currency) problem, there is no way negative ex post real interest rates can do the trick. Negative real rates aren’t suitable if one needs Fx.

• The exchange rate can only temporarily stabilize given the loose policy stance. Capitalizing public banks is good, but is it wise to continue selling precious reserves?