*Heterodox*

- François Quesnay
- Adam Smith
- Thomas Robert Malthus
- Karl Marx
- Léon Walras
- Georg Friedrich Knapp
- Knut Wicksell
- Irving Fisher
- Wesley Clair Mitchell
- John Maynard Keynes
- Alvin Hansen
- Michał Kalecki
- Gunnar Myrdal
- Simon Kuznets
- Joan Robinson
- Friedrich Hayek
- John Hicks
- Richard Stone
- Hyman Minsky
- Milton Friedman
- Paul Samuelson
- Lawrence Klein
- Edmund Phelps
- Robert Lucas Jr.
- Edward C. Prescott
- Peter Diamond
- William Nordhaus
- Joseph Stiglitz
- Thomas J. Sargent
- Paul Krugman
- N. Gregory Mankiw

See also

An **interest rate** is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited or borrowed.

It is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage.^{[1]} It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.^{[2]}

The **annual interest rate** is the rate over a period of one year. Other interest rates apply over different periods, such as a month or a day, but they are usually annualised.

Interest rates vary according to:

- the government's directives to the central bank to accomplish the government's goals
- the currency of the principal sum lent or borrowed
- the term to maturity of the investment
- the perceived default probability of the borrower
- supply and demand in the market
- the amount of collateral
- special features like call provisions
- reserve requirements
- compensating balance

as well as other factors.

A company borrows capital from a bank to buy assets for its business. In return, the bank charges the company interest. (The lender might also require rights over the new assets as collateral.)

A bank will use the capital deposited by individuals to make loans to their clients. In return, the bank should pay individuals who have deposited their capital interest. The amount of interest payment depends on the interest rate and the amount of capital they deposited.

*Base rate* usually refers to the annualized rate offered on overnight deposits by the central bank or other monetary authority.^{[citation needed]}

The *Annual percentage rate* (APR) may refer either to a nominal APR or an effective APR (EAPR). The difference between the two is that the EAPR accounts for fees and compounding, while the nominal APR does not.

The *annual equivalent rate* (AER), also called the effective annual rate, is used to help consumers compare products with different compounding frequencies on a common basis, but does not account for fees.

A *discount rate* is applied to calculate present value.

For an interest-bearing security, *coupon rate* is the ratio of the annual coupon amount (the coupon paid per year) per unit of par value, whereas *current yield* is the ratio of the annual coupon divided by its current market price. *Yield to maturity* is a bond's expected internal rate of return, assuming it will be held to maturity, that is, the discount rate which equates all remaining cash flows to the investor (all remaining coupons and repayment of the par value at maturity) with the current market price.

Based on the banking business, there are deposit interest rate and loan interest rate.

Based on the relationship between supply and demand of market interest rate, there are fixed interest rate and floating interest rate.

*Interest rate targets* are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment. The central banks of countries generally tend to reduce interest rates when they wish to increase investment and consumption in the country's economy. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market. In developed economies, interest-rate adjustments are thus made to keep inflation within a target range for the health of economic activities or cap the interest rate concurrently with economic growth to safeguard economic momentum.^{[3]}^{[4]}^{[5]}^{[6]}^{[7]}

In the past two centuries, interest rates have been variously set either by national governments or central banks. For example, the Federal Reserve federal funds rate in the United States has varied between about 0.25% and 19% from 1954 to 2008, while the Bank of England base rate varied between 0.5% and 15% from 1989 to 2009,^{[8]}^{[9]} and Germany experienced rates close to 90% in the 1920s down to about 2% in the 2000s.^{[10]}^{[11]} During an attempt to tackle spiraling hyperinflation in 2007, the Central Bank of Zimbabwe increased interest rates for borrowing to 800%.^{[12]}

The interest rates on prime credits in the late 1970s and early 1980s were far higher than had been recorded – higher than previous US peaks since 1800, than British peaks since 1700, or than Dutch peaks since 1600; "since modern capital markets came into existence, there have never been such high long-term rates" as in this period.^{[13]}

Possibly before modern capital markets, there have been some accounts that savings deposits could achieve an annual return of at least 25% and up to as high as 50%. (William Ellis and Richard Dawes, "Lessons on the Phenomenon of Industrial Life... ", 1857, p III–IV)

**Political short-term gain**: Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates.**Deferred consumption**: When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.**Inflationary expectations**: Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.**Alternative investments**: The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments effectively compete for funds.**Risks of investment**: There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.**Liquidity preference**: People prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time to realize.**Taxes**: Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss.**Banks**: Banks can tend to change the interest rate to either slow down or speed up economy growth. This involves either raising interest rates to slow the economy down, or lowering interest rates to promote economic growth.^{[14]}**Economy**: Interest rates can fluctuate according to the status of the economy. It will generally be found that if the economy is strong then the interest rates will be high, if the economy is weak the interest rates will be low.

Some economists like Karl Marx argue that interest rates are not actually set purely by market competition. Rather they argue that interest rates are ultimately set in line with social customs and legal institutions. Karl Marx writes:

"Customs, juristic tradition, etc., have as much to do with determining the average rate of interest as competition itself, in so far as it exists not merely as an average, but rather as actual magnitude. In many law disputes, where interest has to be calculated, an average rate of interest has to be assumed as the legal rate. If we inquire further as to why the limits of a mean rate of interest cannot be deduced from general laws, we find the answer lies simply in the nature of interest."^{[15]}

The nominal interest rate is the rate of interest with no adjustment for inflation.

For example, suppose someone deposits $100 with a bank for 1 year, and they receive interest of $10 (before tax), so at the end of the year, their balance is $110 (before tax). In this case, regardless of the rate of inflation, the nominal interest rate is 10% *per annum* (before tax).

The real interest rate measures the growth in real value of the loan plus interest, taking inflation into account. The repayment of principal plus interest is measured in real terms compared against the buying power of the amount at the time it was borrowed, lent, deposited or invested.

If inflation is 10%, then the $110 in the account at the end of the year has the same purchasing power (that is, buys the same amount) as the $100 had a year ago. The real interest rate is zero in this case.

The real interest rate is given by the Fisher equation:

where *p* is the inflation rate.
For low rates and short periods, the linear approximation applies:

The Fisher equation applies both *ex ante* and *ex post*. *Ex ante*, the rates are projected rates, whereas *ex post*, the rates are historical.

There is a market for investments, including the money market, bond market, stock market, and currency market as well as retail banking.

Interest rates reflect:

- The risk-free cost of capital
- Expected inflation
- Risk premium
- Transaction costs

According to the theory of rational expectations, borrowers and lenders form an expectation of inflation in the future. The acceptable nominal interest rate at which they are willing and able to borrow or lend includes the real interest rate they require to receive, or are willing and able to pay, plus the rate of inflation they expect.

The level of risk in investments is taken into consideration. Riskier investments such as shares and junk bonds are normally expected to deliver higher returns than safer ones like government bonds.

An **interest rate** is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited or borrowed.

It is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage.^{[1]} It is the rate a bank or other lender charges to borrow its money, or the rate a bank pays its savers for keeping money in an account.^{[2]}

The **annual interest rate** is the rate over a period of one year. Other interest rates apply over different periods, such as a month or a day, but they are usually annualised.

Interest rates vary according to:

- the government's directives to the central bank to accomplish the government's goals
- the currency of the principal sum lent or borrowed
- the term to maturity of the investment
- the perceived default probability of the borrower
- supply and demand in the market
- the amount of collateral
- special features like call provisions
- reserve requirements
- compensating balance

as well as other factors.

A company borrows capital from a bank to buy assets for its business. In return, the bank charges the company interest. (The lender might also require rights over the new assets as collateral.)

A bank will use the capital deposited by individuals to make loans to their clients. In return, the bank should pay individuals who have deposited their capital interest. The amount of interest payment depends on the interest rate and the amount of capital they deposited.

*Base rate* usually refers to the annualized rate offered on overnight deposits by the central bank or other monetary authority.^{[citation needed]}

The *Annual percentage rate* (APR) may refer either to a nominal APR or an effective APR (EAPR). The difference between the two is that the EAPR accounts for fees and compounding, while the nominal APR does not.

The *annual equivalent rate* (AER), also called the effective annual rate, is used to help consumers compare products with different compounding frequencies on a common basis, but does not account for fees.

A *discount rate* is applied to calculate present value.

For an interest-bearing security, *coupon rate* is the ratio of the annual coupon amount (the coupon paid per year) per unit of par value, whereas *current yield* is the ratio of the annual coupon divided by its current market price. *Yield to maturity* is a bond's expected internal rate of return, assuming it will be held to maturity, that is, the discount rate which equates all remaining cash flows to the investor (all remaining coupons and repayment of the par value at maturity) with the current market price.

Based on the banking business, there are deposit interest rate and loan interest rate.

Based on the relationship between supply and demand of market interest rate, there are fixed interest rate and floating interest rate.

*Interest rate targets* are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment. The central banks of countries generally tend to reduce interest rates when they wish to increase investment and consumption in the country's economy. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market. In developed economies, interest-rate adjustments are thus made to keep inflation within a target range for the health of economic activities or cap the interest rate concurrently with Example

A company borrows capital from a bank to buy assets for its business. In return, the

A company borrows capital from a bank to buy assets for its business. In return, the bank charges the company interest. (The lender might also require rights over the new assets as collateral.)

A bank will use the capital deposited by individuals to make loans to their clients. In return, the bank should pay individuals who have deposited their capital interest. The amount of interest payment depends on the interest rate and the amount of capital they deposited.

The *Annual percentage rate* (APR) may refer either to a nominal APR or an effective APR (EAPR). The difference between the two is that the EAPR accounts for fees and compounding, while the nominal APR does not.

The *annual equivalent rate* (AER), also called the effective annual rate, is used to h

*Annual percentage rate* (APR) may refer either to a nominal APR or an effective APR (EAPR). The difference between the two is that the EAPR accounts for fees and compounding, while the nominal APR does not.

The *annual equivalent rate* (AER), also called the effective annual rate, is used to help consumers compare products with different compounding frequencies on a common basis, but does not account for fees.

A *discount rate* is applied to calculate present value.

For an interest-bearing security, *coupon rate* is the ratio of the annual coupon amount (the coupon paid per year) per unit of par value, whereas *current yield* is the ratio of the annual coupon divided by its current market price. *Yield to maturity* is a bond's expected internal rate of return, assuming it will be held to maturity, that is, the discount rate which equates all remaining cash flows to the investor (all remaining coupons and repayment of the par value at maturity) with the current market price.

Based on the banking business, there are deposit interest rate and loan interest rate.

Based on the relationship between supply and demand of market interest rate, there are fixed interest rate and floating interest rate.

*Interest rate targets* are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment. The central banks of countries generally tend to reduce interest rates when they wish to increase investment and consumption in the country's economy. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market. In developed economies, interest-rate adjustments are thus made to keep inflation within a target range for the health of economic activities or cap the interest rate concurrently with economic growth to safeguard economic momentum.^{[3]}^{[4]}^{[5]}^{[6]}^{[7]}

federal funds rate in the United States has varied between about 0.25% and 19% from 1954 to 2008, while the Bank of England base rate varied between 0.5% and 15% from 1989 to 2009,^{[8]}^{[9]} and Germany experienced rates close to 90% in the 1920s down to about 2% in the 2000s.^{[10]}^{[11]} During an attempt to tackle spiraling hyperinflation in 2007, the Central Bank of Zimbabwe increased interest rates for borrowing to 800%.^{[12]}
## Reasons for changes

The interest rates on prime credits in the late 1970s and early 1980s were far higher than had been recorded – higher than previous US peaks since 1800, than British peaks since 1700, or than Dutch peaks since 1600; "since modern capital markets came into existence, there have never been such high long-term rates" as in this period.^{[13]}

Possibly before modern capital markets, there have been some accounts that savings deposits could achieve an annual return of at least 25% and up to as high as 50%. (William Ellis and Richard Dawes, "Lessons on the Phenomenon of Industrial Life... ", 1857, p III–IV)

**Political short-term gain**: Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can inflThe interest rates on prime credits in the late 1970s and early 1980s were far higher than had been recorded – higher than previous US peaks since 1800, than British peaks since 1700, or than Dutch peaks since 1600; "since modern capital markets came into existence, there have never been such high long-term rates" as in this period.

^{[13]}Possibly before modern capital markets, there have been some accounts that savings deposits could achieve an annual return of at least 25% and up to as high as 50%. (William Ellis and Richard Dawes, "Lessons on the Phenomenon of Industrial Life... ", 1857, p III–IV)

Some economists like Karl Marx argue that interest rates are not actually set purely by market competition. Rather they argue that interest rates are ultimately set in line with social customs and legal institutions. Karl Marx writes:

"Customs, juristic tradition, etc., have as much to do with determining the average rate of interest as competition itself, in so far as it exists not merely as an average, but rather as actual magnitude. In many law disputes, where interest has to be calculated, an average rate of interest has to be assumed as the legal rate. If we inquire further as to why the limits of a mean rate of interest cannot be deduced from general laws, we find the answer lies simply in the nature of interest."

^{[15]}## Real vs nominal

The nominal interest rate is the rate of interest with no adjustment for inflation.

For example, suppose someone deposits $100 with a bank for 1 year, and they receive interest of $10 (before tax), so at the end of the year, their balance is $110 (before tax). In this case, regardless of the rate of inflation, the nominal interest rate is 10%

*per annum*(before tax).The real interest rate measures the growth in real value of the loan plus interest, taking inflation into account. The repayment of principal plus interest is measured in real terms compared against the buying power of the amount at the time it was borrowed, lent, deposited or invested.

If inflation is 10%, then the $110 in the account at the end of the year has the same purchasing power (that is, buys the same amount) as the $100 had a year ago. The real interest rate is zero in this case.

The real interest rate is given by the Fisher equation:

The nominal interest rate is the rate of interest with no adjustment for inflation.

For example, suppose someone deposits $100 with a bank for 1 year, and they receive interest of $10 (before tax), so at the end of the year, their balance is $110 (before tax). In this case, regardless of the rate of inflation, the nominal interest rate is 10% *per annum* (before tax).

The real interest rate measures the growth in real value of the loan plus interest, taking inflation into account. The repayment

*per annum* (before tax).

The real interest rate measures the growth in real value of the loan plus interest, taking inflation into account. The repayment of principal plus interest is measured in real terms compared against the buying power of the amount at the time it was borrowed, lent, deposited or invested.

If inflation is 10%, then the $110 in the account at the end of the year has the same purchasing power (that is, buys the same amount) as the $100 had a year ago. The real interest rate is zero in this case.

The real interest rate is given by the Fisher equation:

where *p* is the inflation rate.
For low rates and short periods, the linear approximation applies:

The Fisher equation applies both *ex ante* and *ex post*. *Ex ante*, the rates are projected rates, whereas *ex post*, the rates are historical.

There is a market for investments, including the money market, bond market, stock market, and currency market as well as retail banking.

Interest rates reflect:

- The risk-free cost of capital
- Expected market for investments, including the money market, bond market, stock market, and currency market as well as retail banking.
Interest rates reflect:

- The risk-free cost of capital
- Expected inflation
- Risk premium
- rational expectations, borrowers and lenders form an expectation of inflation in the future. The acceptable nominal interest rate at which they are willing and able to borrow or lend includes the real interest rate they require to receive, or are willing and able to pay, plus the rate of inflation they expect.
### Risk

The level of risk in investments is taken into consideration. Riskier investments such as shares and junk bonds are normally expected to deliver higher returns than safer ones like The level of risk in investments is taken into consideration. Riskier investments such as shares and junk bonds are normally expected to deliver higher returns than safer ones like government bonds.

The additional return above the risk-free nominal interest rate which is expected from a risky investment is the risk premium. The risk premium an investor requires on an investment depends on the The additional return above the risk-free nominal interest rate which is expected from a risky investment is the risk premium. The risk premium an investor requires on an investment depends on the risk preferences of the investor. Evidence suggests that most lenders are risk-averse.

^{[16]}A

**maturity risk premium**applied to a longer-term investment reflects a higher perceived risk of default.There are four kinds of risk:

Most investors prefer their money to be in cash rather than in less fungible investments. Cash is on hand to be spent immediately if the need arises, but some investments require time or effort to transfer into spendable form. The preference for cash is known as liquidity preference. A 1-year loan, for instance, is very liquid compared to a 10-year loan. A 10-year US Treasury bond, however, is still relatively liquid because it can easily be sold on the market.

### A market model

A basic interest rate pricing model for an asset is