On the (ir)relevance of interest rates

Next week I will give a review of “Where does money come from?” by prof. Richard Werner and others. That book provides a critical analysis of how the banking system works and debunks several “myths”. Importantly it shreds the idea that central banks are able to control money creation by commercial banks through interest-rate policy and capital requirements.

For now I would like to share two articles by economics blogger LK:

The Inconvenient Truth about Interest Rates and Investments

and

Post Keynesian Policy on Interest Rates

In the first article LK cites an elaborate survey on how interest rates influence investment decisions by businesses. The main conclusion is that (minor) fluctuations in interest rates have virtually no effect on investments – at least not for the majority of businesses.

These findings severely undercut the conventional “wisdom” that a (moderate) increase of interest rates does decrease the demand for loans. An important consequence of this is that central bank interest rate policy, in particular the minor shifts we see these days, has a questionable effect on inflation.

In the second article LK shows an inclination to fix central bank interest rates at a certain value (possibly close to, or even at zero) and instead to turn to fiscal policy rather than monetary policy.

Advertisements

4 thoughts on “On the (ir)relevance of interest rates”

    1. 🙂 I’ll give you a minor hint: most money in our economy is created by banks when they provide loans to the public. I hope you can live with this and wait for the details.

First comment? Please read our comment policy first

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s