Possible Misinterpretations of Equivalent Annual Incomes in Inflationary Times

1987 ◽  
Vol 4 (4) ◽  
pp. 210-211
Author(s):  
W. David Klemperer
Keyword(s):  
Interest Rate ◽  
Real Interest Rate ◽  
Inflation Rate ◽  
Present Value ◽  
Expected Inflation

Abstract Equivalent annual incomes (EATs) are often computed to compare investments with similar size but different lives. One common form of EAT fails to readily illustrate that before-tax present values of new projects should not change with inflationary expectations, given the same real interest rate. This type of EAI also fails to reflect reduction in after-tax present value of new projects as expected inflation rises. An EAI formulation is suggested that eliminates these problems and assures correct project rankings regardless of the inflation rate. North. J. Appl. For. 4:210-211, December 1987.

Inflation-Linked Bonds

2019 ◽  
pp. 345-362
Author(s):  
John Lettieri ◽  
Gerald O’donnell ◽  
Seow Eng Ong ◽  
Desmond Tsang
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Real Interest Rate ◽  
Inflation Rate ◽  
Critical Factor ◽  
Inflation Expectations ◽  
Investment Strategies ◽  
Fixed Income ◽  
Inflation Risk ◽  
Expected Inflation

Inflation is a critical factor that can influence investment strategies and returns. The relation between realized inflation and expected inflation are driving factors for both interest rates and the performance of fixed income products. Adding inflation-linked bonds to existing portfolios can help to minimize the risk associated with future inflation. Although nominal bonds offer protection from current inflation expectations, which is sometimes measured by the break-even inflation rate, inflation-linked bonds offer a guaranteed real return with inherent protection from unexpected inflation. The relative performance of inflation-linked bonds versus nominal bonds is primarily dependent on changes in both inflation and the real interest rate. This chapter focuses on the fundamentals of inflation-linked bonds including issuers, pricing, and measuring inflation expectations. It examines how such bonds reduce inflation risk and discusses the type of market environments that favor investments in inflation-linked bonds relative to nominal bonds.

Impacts of Real Depreciation and Appreciation on Aggregate Output in Taiwan

2018 ◽  
Vol 65 (1) ◽  
pp. 123-130
Author(s):  
Yu Hsing
Keyword(s):  
Interest Rate ◽  
Gross Domestic Product ◽  
Stock Price ◽  
Real Interest Rate ◽  
Jel Classification ◽  
Oil Price ◽  
Real Gross Domestic Product ◽  
Real Gdp ◽  
Expected Inflation ◽  
Deficit Spending

Extending the IS-MP-AS model, this article finds that real depreciation helped to raise real gross domestic product (GDP) during 1999.Q1-2010.Q2 whereas real appreciation helped to increase real GDP during 2010.Q3-2016.Q4. In addition, a lower world real interest rate, a higher stock price, a higher real oil price or a lower expected inflation would increase real GDP. More deficit spending as a percent of GDP does not affect real GDP.JEL Classification: F41, E62

The Long Slump

2011 ◽  
Vol 101 (2) ◽  
pp. 431-469 ◽  
Author(s):  
Robert E Hall
Keyword(s):  
Interest Rate ◽  
Real Interest Rate ◽  
Inflation Rate ◽  
Full Employment ◽  
Consumer Debt ◽  
Real Rate ◽  
Consumer Durables ◽  
The Great Depression ◽  
Real Estate Prices ◽  
The Interest Rate

In a market-clearing economy, declines in demand from one sector do not cause large declines in aggregate output because other sectors expand. The key price mediating the response is the interest rate. A decline in the rate stimulates all categories of spending. But in a low-inflation economy, the room for a decline in the rate is small, because of the notorious lower limit of zero on the nominal interest rate. In the Great Depression, substantial deflation caused the real interest rate to reach high levels. In the Great Slump that began at the end of 2007, low inflation resulted in an only slightly negative real rate when full employment called for a much lower real rate because of declines in demand. Fortunately, the inflation rate hardly responded to conditions in product and labor markets, else deflation might have occurred, with an even higher real interest rate. I concentrate on three closely related sources of declines in demand: the buildup of excess stocks of housing and consumer durables, the corresponding expansion of consumer debt that financed the buildup, and financial frictions that resulted from the decline in real-estate prices. (JEL E23, E24, E31, E32, E65)

scholarly journals The Macroeconomic Determinants of Foreign Bank’s Profitability in Malaysia

2018 ◽  
Vol 7 (3.21) ◽  
pp. 152
Author(s):  
Pang Jiunn Yi ◽  
Devinaga R ◽  
Yuen Yee Yen ◽  
Suganthi . ◽  
Shalini .
Keyword(s):  
Interest Rate ◽  
Real Interest Rate ◽  
Inflation Rate ◽  
Research Study ◽  
Time Series Data ◽  
Foreign Banks ◽  
Series Data ◽  
Return On Assets ◽  
Cross Sectional ◽  
Macroeconomic Determinants

The topic of this research paper is “The macroeconomic determinants of foreign bank’s profitability in Malaysia. Panel data method were employed to analyze the cross sectional data and time series data collected  from 2006 to 2015 from a sample of ten foreign banks in Malaysia. Measurement of profitability is based on Return on assets which is a function of the macroeconomic determinants; GDP, inflation rate and real interest rate. The overall finding of this research study shows that GDP, inflation rate and real interest rate are the determinants of foreign banks in Malaysia. Those determinants were found to be statistically related on profitability and all of them had a positive relationship towards the profitability of foreign banks in Malaysia.  

scholarly journals Effects of Depreciation and Appreciation of the Vietnamese Dong on Aggregate Output

2019 ◽  
Vol 9 (2) ◽  
pp. 45
Author(s):  
Yu Hsing ◽  
Minh Q. Huynh
Keyword(s):  
Economic Development ◽  
Stock Price ◽  
Real Interest Rate ◽  
Inflation Rate ◽  
Oil Price ◽  
Aggregate Output ◽  
The Real ◽  
Expected Inflation ◽  
The World ◽  
The Government

Applying an extended IS-MP-AS model (Romer, 2000, 2006), this paper finds that real appreciation of the Vietnamese dong raised aggregate output during 2000-2012 whereas real depreciation of the Vietnamese dong increased aggregate output during 2013-2017. In addition, aggregate output is positively affected by the government debt-to-GDP ratio, the real stock price, and the real oil price and negatively influenced by the world real interest rate and the expected inflation rate. Therefore, real depreciation may affect aggregate output positively or negatively depending upon the stage of economic development.

Short-Term Output Fluctuations in Poland: An Application of the Is-Mp-As Model

2005 ◽  
Vol 49 (2) ◽  
pp. 44-50
Author(s):  
Yu Hsing
Keyword(s):  
Interest Rate ◽  
Stock Prices ◽  
Inflation Rate ◽  
Policy Implications ◽  
Short Term ◽  
Expected Inflation ◽  
Output Fluctuations ◽  
National Bank ◽  
The Interest Rate ◽  
Expected Outcomes

This paper examines output fluctuations in Poland based on an extended IS-MP-AS model (Romer, 2000) and the Taylor rule (1993, 1998, 1999). Empirical results show that real output is negatively influenced by the expected inflation rate, the deficit/GDP ratio, and the euro interest rate while it is positively affected by real appreciation and stock prices. Policy implications are that expansionary fiscal policy would not generate expected outcomes and that the conventional approach of currency devaluation to stimulate the economy may not apply to Poland due to the National Bank of Poland's potential reaction to raise the interest rate.

scholarly journals The Impact of Financial Risks on Financial Investment in Infrastructure: Based on a Two-Factor Stochastic Differential Equation

2021 ◽  
Vol 2021 ◽  
pp. 1-14
Author(s):  
Qiming Zhang ◽  
Xuemeng Guo ◽  
Hongchang Li
Keyword(s):  
Differential Equation ◽  
Interest Rate ◽  
Risk Sharing ◽  
Inflation Rate ◽  
Financial Risks ◽  
Present Value ◽  
Private Partnership ◽  
Financial Investment ◽  
Inflation Volatility ◽  
Interest Rate Volatility

Financial risks, such as inflation and interest rate changes, significantly affect the costs and benefits of infrastructure projects. Nevertheless, there is a dearth of research concerning financial investment (government subsidies) for infrastructure projects in the context of inflation and interest rate changes. Accordingly, this study builds a stochastic differential equation model based on inflation rate and interest rate, through which the expression of government subsidies in public-private partnership is optimised. Specifically, the Monte Carlo simulation was used to undertake a calculation of the present value of operating loss subsidy and risk-sharing subsidy for the N City Metro Line 3. Subsequently, the effect of inflation, nominal interest rates, interest rate volatility, as well as inflation volatility, on the present value of operating loss subsidies was investigated. It was established that the dynamic random discount rate based on inflation rate and interest rate may effectively simulate the effect of inflation rate and interest rate changes on project operating loss. Moreover, it is feasible to calculate the present value of the risk-adjusted operating loss subsidy and the present value of the risk-sharing subsidy. Inflation rate, inflation volatility, and interest rate volatility are positively correlated with the present value of operating loss subsidies, whereas the interest rate is negatively correlated with the present value of inflation-adjusted operating loss subsidies. Inflation volatility has the greatest effect on the present value of subsidies, followed by interest rate volatility and inflation rate. Ultimately, this paper provides an effective tool for quantitative simulation of and risk-sharing in public-private partnership projects, which can facilitate a regional economy’s sustainable development.

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