machines. The real interest rate is used in various economic theories to explain such phenomena as capital flight, business cycles and economic bubbles. When the real rate of interest is high, because demand for credit is high, then the usage of income will, all other things being equal, move from consumption to saving, and physical investment will fall. Conversely, when the real rate of interest is low, income usage will move from saving to consumption, and physical investment will rise. Different economic theories, beginning with the work of Knut Wicksell, have had different explanations of the effect of rising and falling real interest rates. Thus -- assuming risks are constant -- international capital moves to markets that offer higher real rates of interest from markets that offer low or negative real rates of interest. Capital flows of this kind often reflect speculation in financial and foreign exchange rate markets. Real federal funds rate In setting monetary policy, the U.S. Federal Reserve (and other central banks) uses open market operations, affecting the amounts of very short-term funds (federal funds) supplied and demanded and thus affecting the federal funds rate. By targeting this at a low rate, they can encourage borrowing and thus economic activity; or the reverse by raising the rate. Like any interest rate, there are a nominal and a real value defined as described above. Further, there is a concept called the "equilibrium real federal funds rate" (r*, or "r-star"), alternatively called the "natural rate of interest" or the "neutral real rate", which is the "level of the real federal funds rate, if allowed to prevail for several years, [that] would place economic activity at its potential and keep inflation low and stable." There are various methods used to estimate this amount, using tools such as the Taylor Rule. It is possible for this rate to be negative. Negative real interest rates The real interest rate solved from the Fisher equation is If there is a negative real interest rate, it means that the inflation rate is greater than the nominal interest rate. If the Federal funds rate is and the inflation rate is , then the borrower would gain of every dollar borrowed per year. Negative real interest rates are an important factor in government fiscal policy. Since 2010, the U.S. Treasury has been obtaining negative real interest rates on government debt, meaning the inflation rate is greater