The Discount Rate is a refers to interest rate at which the Federal Reserve or central bank of that country provides loans to the member banks operating in that country. This discount rate is a tool for the fluctuation of interest rates which is not used as the primary tool for monetary policy implementations. However, whenever this tool is implemented, it is done so on the basis of the inflation rate prevailing in the economy. Generally, the best measure of the interest rates is the CPI (Consumer Price Index). Instead of the CPI, the Retail Price Index (RPI) can also be used as an alternative to measure the interest rates.
This Retail Price Index is a little different in value from the CPI in value but the computations are a lot different for the two. The RPI can be used just like a substitute for the CPI when it comes to measuring the discount rate due to obvious similarity in the quantity these both are measuring – the inflation rate. When talking about substitutes, it should be understood that they should also be measuring the inflation rate. Only this will allow them to act as proper substitutes for the CPI. Therefore, another substitute for the same purpose is the Index of Producer Prices (PPI), which was Wholesale Price Index earlier.
This index is similar to the computation methods of the RPI but instead is based upon wholesale rate sampling and has differences in weights and other small changes that makes it a little different from the RPI calculations. Both the RPI and the PPI are suitable substitutes for the measurement of the discount rates just like the CPI does the same. The values of these indexes lie in close proximity to each other; the difference arises from the computational and sampling variations of the quantities selected to form the inputs.
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