Abstract
Real interest rates are calculated by subtracting a measure of expected inflation from the nominal interest rate. Real interest rates influence investment and saving decisions and affect the level of economic activity. During the 1980s, real interest rates have risen due to: 1. monetary policy actions, 2. changes in investment incentives, and 3. changes in savings decisions. From the fall of 1979 through the fall of 1982, the Federal Reserve sought to reduce the country's very high inflation through lower money growth. This period of tight money also was a time of very high real interest rates. From late 1982 through the end of 1983, real interest rates again were high at all maturities, due to policy changes in the federal tax code that increased the investment tax credit and changed the capital depreciation schedules. For 1984 and 1985, changes in savings patterns appeared to be responsible for the high interest rates.