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]]>Lorenzo, You’re so welcome. Glad to hear that you found it helpful.

Andrew, I think that you are reading too much into my comments. My initial assertion that the equilibrium real rate in a stationary equilibrium must be zero was too strong. I think that it is plausible that it would be zero, but I don’t have an argument that demonstrates that it must be. I don’t think that Bohm Bawerk’s argument was totally convincing because he was implicitly (or perhaps explicitly) presuming the existence of growth. Roundabout production processes are productive, hence there is growth. The argument may be circular. But the point of my post was not to expound a theory of interest; it was simply to test the logic of the argument Sraffa deployed against Hayek. So all the points that you raise about the existence of capital goods and the like are perfectly good arguments, but are irrelevant for the very narrow theoretical exercise I was performing.

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]]>I was just going with David’s assumption of a 0% real rate. I agree that would be unlikely in the real world.

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]]>“But that seems wrong to me: What matters is not how many tomatoes a tomato will buy in the future (obviously 1), but what other goods it will buy.”

In a lending arrangement one person gives up time while another gives up a good. I lend you one tomato for a period of time and expect to get more than one tomato back (real interest) or a tomato that buys more other goods in the future (inflation interest) than the one I lent you . Any interest rate (real or nominal) is a measure of the cost of time.

And so the question how many tomatoes a tomato will buy in the future is a bit misleading. The question is what nominal return on a tomato will you accept in the future to give up possession of a tomato today – how much is your time worth in tomatoes.

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]]>I think I’ve finally managed to grasp what your post is really saying and I can see which part I disagree with.

You are deriving the own rates by looking at relative price changes.

Quoted in tomatoes the price of cucumbers increases by 22% between periods so you need a nominal interest rate of 22% to equal a 0% real rate

Similarly: quoted in tomatoes the price of tomatoes increases by 0% so you need a nominal interest rate of 0% to equal a 0% real rate.

But that seems wrong to me: What matters is not how many tomatoes a tomato will buy in the future (obviously 1), but what other goods it will buy. In your example tomatoes have appreciated against both other goods so its nominal interest rate will have to be negative for it to equal a 0% real rate.

If we imagine a money economy with 10% inflation: $1 today will still buy $1 next year, but that doesn’t mean that the nominal own-rate for money is always the same as the real rate. What matters is that in one year $1 will buy 10% less of other goods so the nominal rate will need to be real-rate+10%.

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]]>should say

“Your chart is saying that in the CURRENT period…..”

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