(ECONOMICS) the difference between the nominal interest rate and the rate of inflation; the actual premium charged by banks for lendable funds.
The real interest rate can be determined by subtracting the annualized rate of inflation from the prime rate offered by banks to borrowers with the
best credit.
During the 1970's, the USA experienced relatively
high inflation (peaking at
17% in
January 1980). In some months this exceeded the prime rate, resulting in negative interest rates for
short periods (e.g., April-October, 1978; Feb-July, 1979).
One problem of deflation (i.e., falling absolute prices) is that it
always occurs when the economy is in VERY severe recession, and there is no way the central bank can reduce the real interest rate to zero, since 0% nominal rates minus negative inflation = positive real interest rates.
