<p>I think the logic can look somewhat like this.</p>
<h3>Decomposition of nominal GDP growth</h3>
<p>Following Olivier Blanchard's coursebook (page 51):</p>
<blockquote>
<p>The rate of growth of nominal GDP is equal to the rate of inflation
plus the rate of growth of real GDP.</p>
</blockquote>
<p>Thus,
<span class="math-container">$$
g_{\text{nominal}} = \pi + g_{\text{real}} \tag{*}\label{eq1}.
$$</span></p>
<h3>Fisher equation</h3>
<p>The Fisher equation relates nominal interest rates <span class="math-container">$i$</span> to real interest rates <span class="math-container">$r$</span> and expected inflation <span class="math-container">$\pi^e$</span>:</p>
<p><span class="math-container">$$
i = r + \pi^e.
$$</span></p>
<p>In the long run, expected inflation aligns with actual inflation, so:</p>
<p><span class="math-container">$$
i \approx r + \pi.
$$</span></p>
<h3>Real interest rates and real GDP growth</h3>
<p>Over the long run, real interest rates <span class="math-container">$r$</span> tend to align with the growth rate of real GDP <span class="math-container">$g_{\text{real}}$</span>, reflecting the economy’s productive capacity:</p>
<p><span class="math-container">$$
r \approx g_{\text{real}}.
$$</span></p>
<h3>Connecting nominal interest rates and nominal GDP growth</h3>
<p>Substituting <span class="math-container">$r \approx g_{\text{real}}$</span> into the Fisher equation:</p>
<p><span class="math-container">$$
i \approx g_{\text{real}} + \pi.
$$</span></p>
<p>Combining this with the equation for nominal GDP growth \eqref{eq1}:</p>
<p><span class="math-container">$$
g_{\text{nominal}} = \pi + g_{\text{real}},
$$</span></p>
<p>we find:</p>
<p><span class="math-container">$$
i \approx g_{\text{nominal}}.
$$</span></p>
<h3>References</h3>
<p>Blanchard, O. (2017). Macroeconomics (7th Edition). New York: Pearson.</p>

CC BY-SA 4.0
2024-11-19T10:53:26.030Z
everything clear, expect for why real interest rates tend to align with the growth rate of real GDP, can you please elaborate on this?    P.S. I'm taking a Bachelor in Economics, the  module concerned  is "Foundations of Macroeconomics".
macro_student
CC BY-SA 4.0
2024-11-18T13:46:28.927Z
2024-11-18T13:46:28.927Z
bajun65537
<p>The so called natural rate of interest is determined by the supply of loanable funds (aka degree of consumer savings) and the demand to borrow money.</p>

CC BY-SA 4.0
2024-11-23T17:48:48.900Z
2024-11-23T17:48:48.900Z
Zak Young
<p>Can you pls explain why long-term nominal interest rates should be around of the level of nominal potential GDP? What would be the macroeconomic forces behind it?</p>

CC BY-SA 4.0
2024-11-18T13:52:17.903Z
For the future, it might help to share what course you are taking and what reading is recommended. This way we'll know how best to answer your question, what notation to use etc.
bajun65537
<macroeconomics><interest-rate><finance><bonds>
Determinants of long term interest rates
macro_student
# Determinants of long term interest rates

(Asked by: username_0 on 2024-11-17)

Can you pls explain why long-term nominal interest rates should be around of the level of nominal potential GDP? What would be the macroeconomic forces behind it?

**Tags:** macroeconomics, interest-rate, finance, bonds
> **Comments:**
> **username_1**: For the future, it might help to share what course you are taking and what reading is recommended. This way we'll know how best to answer your question, what notation to use etc.  

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## 2 answers

### Answer by username_1 on 2024-11-18. Score: 0

I think the logic can look somewhat like this.

### Decomposition of nominal GDP growth

Following Olivier Blanchard's coursebook (page 51):

> The rate of growth of nominal GDP is equal to the rate of inflation
> plus the rate of growth of real GDP.

Thus,
$$
g\_{\text{nominal}} = \pi + g\_{\text{real}} \tag{\*}\label{eq1}.
$$

### Fisher equation

The Fisher equation relates nominal interest rates $i$ to real interest rates $r$ and expected inflation $\pi^e$:

$$
i = r + \pi^e.
$$

In the long run, expected inflation aligns with actual inflation, so:

$$
i \approx r + \pi.
$$

### Real interest rates and real GDP growth

Over the long run, real interest rates $r$ tend to align with the growth rate of real GDP $g\_{\text{real}}$, reflecting the economy’s productive capacity:

$$
r \approx g\_{\text{real}}.
$$

### Connecting nominal interest rates and nominal GDP growth

Substituting $r \approx g\_{\text{real}}$ into the Fisher equation:

$$
i \approx g\_{\text{real}} + \pi.
$$

Combining this with the equation for nominal GDP growth \eqref{eq1}:

$$
g\_{\text{nominal}} = \pi + g\_{\text{real}},
$$

we find:

$$
i \approx g\_{\text{nominal}}.
$$

### References

Blanchard, O. (2017). Macroeconomics (7th Edition). New York: Pearson.

> **Comments:**
> **username_0**: everything clear, expect for why real interest rates tend to align with the growth rate of real GDP, can you please elaborate on this?    P.S. I'm taking a Bachelor in Economics, the  module concerned  is "Foundations of Macroeconomics".  

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### Answer by username_2 on 2024-11-23. Score: 0

The so called natural rate of interest is determined by the supply of loanable funds (aka degree of consumer savings) and the demand to borrow money.


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