The Real Long-Term Rate for the US, the UK, and Japan - Assignment Example

The paper “The Real Long-Term Rate for the US, the UK, and Japan” is a brief example of the assignment on macro & microeconomics.  We observe very large and rapid declines in the policy rate (the very short-term rate) in late 2008 and early 2009. Considering the US, the UK, and Japan, did long-term rates fall as much around that time or less or more?

As compared to the rapid declines in the policy rate in late 2008 and 2009, the long-term rate falls as much around that time in many advanced countries.  The USA policy rate has remained below 0% from 2008 to 2012. The UK remained low up to 2011 where it rose and fell afterward in 2012. Japan's policy rates fell lower in the long-term as compared to the short term rates (2008-2009). Moreover, forward curves show that markets will be pricing in low policy rates in the major advanced economies such as the US, UK, and Japan. According to the federal open market committee, given the macroeconomic outlook, the federal funds rate will remain at low levels at least until late 2014.

Using the most recent survey-based estimates of inflation expectations, estimate the real long-term rate for the US, the UK, and Japan for June 2012
Developments in the long-term inflation expectations play a very important role in the central banks’ monitoring and assessment activity since well-anchored expectations are central to the functioning of the monetary transmission mechanism. Currently, the long term inflation does not signal rising risks of price stability within Japan, the USA, and the UK. The survey indicates that the long-term inflation expectations will remain stable and within the central banks’ inflation goals. The survey indicates that the stability of the long-term inflation expectation depends on the high credibility of central banks of these countries which means that these banks have some leeway to offer further monetary stimulus. However, the credibility of the central banks’ of these three countries should not be taken for granted because if the economy remains weak and underlying solvency and structural problems remain unresolved the central banks’ may come under growing pressure to do more. As a result, a vicious circle can develop with a widening gap between what the central banks can actually deliver and what they are expected to deliver and this would make the eventual exit from monetary accommodation harder and may eventually threaten the inflationary expectations of this countries.

Estimate the real long-term rates

1. Brazil
Brazil is one of the emerging economies in the world and it's growing at a very fast rate. The country’s inflation rate was 5.2% in July 2012 and it has an inflation rate of 419.3%. The graph below show’s Brazil’s inflation rates since 2010

On the other hand, Brazil’s interest rate was reported to 8% which is the lowest since 1990, historically, from 1999 to 2012 the country’s interest rates averaged 16.6%.  The central bank of Brazil’s monetary committee makes decisions relating to interest rates. The following graph represents Brazil’s interest rates since 2010-1212

India
Just like Brazil, India is one of the emerging economies in the world. The country reported an inflation rate of 6.87% in 2012. Moreover, India’s inflation rate averaged 8% since 1969. The graph below represents India’s long-term inflation rates since 2010-2012  

On the other hand, India’s interest rate was reported to 8% just like Brazil. Historically, from 200 to 2012 the country’s interest rates averaged 6.49%.  Reserve Bank of India's Central Board of Directors makes decisions relating to interest rates. The following graph represents India’s long-term interest rates since 2010-1212

China
China is the second-biggest economy in the world; it is classified as an emerging economy. The country recorded an inflation rate of 1.8% in July. Historically, from 1994 until 2012, the country’s inflation rate averaged 4.3%. The low inflation rates have reduced the price of commodities as well as increase the country’s GDP. The graph below represents China’s long-term inflation rates since 2010-2012

The benchmark interest rate in China was last reported at 6 percent, historically, from 1996 until 2012, China Interest Rate averaged 6.4600 Percent reaching an all-time high of 10.9800 percent in May of 1996 and a record low of 5.3100 percent in August of 2010m In China, interest rates decisions are taken by The Peoples' Bank of China Monetary Policy Committee, the PBC administers two different benchmark interest rates: one-year lending and the one-year deposit rate