Calculating Real Interest Rates Under Price Level Shifts

"You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I'm offering is the truth." - Morpheus, The Matrix (1999)

As a follow up to yesterday's post on interpreting measured deflation, someone on Twitter remarked that since inflation is negative, real interest rates would be high, so BNM should cut the OPR. A Bloomberg Opinion article said roughly the same thing. I could respond by saying that since this analysis is based on the false premise that Malaysia is in a deflationary environment, that policy prescription would also be false. But the question is interesting enough that it bears both examination and explanation.

What is a real interest rate, and why does it matter?

When Deflation Isn’t Deflation

It’s been an awfully long time since I wrote a post. There have been a lot of reasons for the hiatus, both professionally as well as personally. The change in government last year also caused some switches in senior management where I work, and my workload has risen as a result. At a personal level, the passing of my father in June and wrapping up his estate has taken a toll on the entire family, which obviously took up a lot of time. I’ve also been spending more time on my fitness level, since hitting the big 50 milestone last year. With all these things going on, blogging has taken a bit of a backseat for the past year. On the other hand, I first started writing this blog 10 years ago this month, and it has been a major part of my life, and I’m determined that it will continue to be. So as an entrée back into blogging regularly, I’m going to address the hot topic of the week: Deflation.