In countries with high inflation rates, nominal interest rates are also high. Recall that the nominal interest

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In countries with high inflation rates, nominal interest rates are also high. Recall that the nominal interest rate equals the real interest rate plus the expected rate of inflation. Colombia is one country that has consistently high rates of inflation. Consequently, its depository institutions usually offer high nominal interest rates to attract people’s cash. In Cuidad Bolivar, about an hour from Bogota, the Caja Social de Ahorros (Social Savings Bank) services a low-income area of about 1 million people. This depository institution was started by a Jesuit priest and has a board of directors appointed by the Jesuits. In 1998, it paid 19 percent on passbook savings accounts. This sounds high but not compared to Colombia’s 22 percent rate of inflation that year. Thus, its 10,000 depositors are willing to accept a 3 percent negative real interest rate. Why? 

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