Tuesday, March 4, 2014

The "real" thing

Paul Krugman described this graph as "actual r-g — strictly speaking, interest rates minus the rate of growth of GDP over the previous year — since 1952":

Graph #1: Interest Rate "r" less GDP Growth Rate "g"
That was from his 2 March post. But on 1 March he described it thus:

...the relationship between “r”, the real interest rate, and “g”, the economy’s long-run growth rate.

See the problem? On the first of March he was talking about the real interest rate explicitly, and the real growth rate, implicitly.

On the second, real was forgotten.

So I did the graph. I'm not sure of the math, but I've seen people calculate the real interest rate by subtracting the rate of inflation from the nominal interest rate. So I did that. Then I subtracted a measure of "real GDP" from FRED:

Graph #2: Real Interest Rate "r" less Real GDP Growth Rate "g"
Okay. Pretty much the same as the first graph.

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