This is the Cato Daily Podcast for Monday, November 26, 2018.

I'm Caleb Brown.

At the Cato Institute's Monetary Conference, I sat down with Claudia Borneo of the Bank of International Settlements or BIS,

where he serves as head of the monetary and economic department.

We talked about the real rate of interest, housing market's role in monetary decisions, and the tax codes impact

on all of the above.

For the benefit of our listeners who don't, aren't steeped in monetary policy.

What is the real rate of interest?

The real rate of interest, in fact, is something very simple.

It's the nominal rate of interest minus the inflation rate.

Or sometimes more in a slightly more sophisticated approach is the nominal rate of interest minus. an particular asset or whatever describes how the value of that asset in relation to goods and services increases over time.

All right, so how do policy makers influence the real rate of interest or do they?

Well, policy makers, it depends what you're, it depends whether you're talking

about the short run and the long run and it also depends on what kind of analytical framework you have to understand how the two are related.

I think no one disagrees that in the short run the real interest rate is set through a

combination of Central Banks market, and indeed the behavior of actors throughout the economy.

So the Central Bank sets the short-term rate, nominal short-term rate, and influences the long-term rate through its announcements of how the

short-term rate will evolve over time, as well as through direct asset purchases.

Market participants take the short rate as given, through their purchases through their portfolio decisions

which depend on their views about the economy on their risk-taking they

influence long-term interest rates as well. But these are nominal. These are all nominal. In the

short run prices are given. So that in effect sets also the real rate. But then the question is what happens to the real rate over time.

...