Re: P.S.

[Sabri Oncu <soncu@xxxxxxxxxxx>]

Jim writes:

> real rate of interest = nominal rate of interest + rate of
deflation.

Jim,

First of all, this is an approximate relationship which holds
true for small rates only so assume that rates are small. Now, if
the absolute value of nominal rate of interest is larger than
rate of deflation and nominal rate of interest is negative then
even in a deflationary economy real rate of interest can be
negative. Like 1 basis point of rate of deflation and -2 basis
points of nominal rate of interest result in -1 basis point of
real rate of interest. So your conclusion that in a deflationary
economy negative real interest rates are impossible does not
follow from the above relationship. If in a deflationary economy
negative real interest rates are impossible, then there must be
another explanation which rejects the possibility of the example
I constructed above.

Sabri