Money Rate Vs Real Rate

Money Rate Vs Real Rate

Money rate include the inflation where the real exclude the inflation. The relationship between money rate and real rather can be explained with fisher formula.

(1+Money Rate) = (1+Inflation Rate)(1+Real Rate)

Money Rate and Real rate for Discounting

Money rate would be used for discounting the inflated cash flows where the real rate will be used for discounting the real cash flows. It is therefore necessary that we must have relevant rate for discounting.

Rules for Discounting

Cash Flow	Discounting Rate
Real Cash flow	Real Rate
Money Cash flow (Inflated cash Flows)	Money Rate
One inflation	Real Rate may be used
More inflation	Only Money Rate

Above table explain that for real cash flow real rate can be used and similarly for inflated cash flow we will use money rate, and therefore if any element is missing then we first calculate that element and then we will perform discounting.