The June quarter 2015 edition of the Reserve Bank of Australia Bulletin has an interesting article – Firms’ Investment Decisions and Interest Rates – which further erodes the mainstream economics claim that business investment is negatively related to interest rates in any continuous way. The implications of the RBA research are many. First, it further helps us understand why monetary policy (adjusting interest rates) is not a very effective way of managing aggregate spending. Second, the research undermines the validity of the mainstream claims that crowding out of private expenditure occurs when government spending rises. The paper finds that investment decisions by firms is not sensitive to interest rate variations within certain ranges. Third, it demonstrates that business investment is driven significantly by subjective sentiment rather than being an exact process driven by quantifiable metrics.Bill Mitchell – billy blog
Why investment expenditure is insensitive to monetary policy
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
4 comments:
Talking about investment, this one is really good for a laugh: Tony Abbott staffer reveals all about the wind farm commissionner announcement ....
https://youtu.be/zrxj2eQTIhc
Paul Krugman comes out with an MMT-style view of hyperinflation:
"all the hyperinflations I know about involved governments too weak to collect taxes"
http://krugman.blogs.nytimes.com/2015/06/21/avoiding-apocalypse/
"You gotta dance when the music is playing..." - Chuck Prince CEO Citigroup
The 'music is playing' during times when this graph is upward sloping:
http://chartsninja.com/charts/single/6956
I like Bill but here he's simply shadow boxing. Serious mainstream economists would all agree with the statement that business investment is interest-inelastic. It's when you add the housing component that investment becomes responsive to interest rate movements.
In any event, in simple models such as ISLM, the interest rate is simply used as a proxy for the cost of capital. In more elaborate models, investment is determined by a whole range of variables.
You know who else repeats this fact about interest rates having no effect on investment? Monetarists and the last of the true believers at the ECB. Not really helpful for promoting Keynesianism.
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