Interest rates have no impact on investment as assumed by economists

Surname
ECO202
Macro-Economic Theory & Policy
Writing Assignment 2
Interest rates have no impact on investment as assumed by economists
Introduction
Central banks suppose that change in interest rates directly spurs economic growth. This assertion is informed by recent research findings showing that adjusting interest rates does not necessarily impact household spending and business investment. Economists assume that businesses and households adjust their spending in tandem with changes in interest rates. The research brief will seek to determine the efficacy of monetary policy for mitigating the effects of demand shocks on short-term output; and the implications for the appropriate level of aggressiveness in central bank monetary policy rule. The empirical facts will be linked to economic models. Besides, the research will summarize and analyze the research article Tight, loose, irrelevant: Interest rates do not seem to affect investment as economists assume published in the economist. This essay sets out to summarize and analyze research findings described in the article and further evaluate its monetary policy implications. While governments use the interest rate as a monetary policy tool, recent research suggests that it has no impact on investment, as assumed by economists.
Interest rate adjustment: Irrelevant?
Globally, central banks cut interest rates whenever there is a need to spur economic growth and adjust upwards if there is a need for dampening growth (Tight, Loose 2014). Economists presume that these changes will directly affect businesses and households and compel them to adjust their spending behavior. Recent economic research findings suggest that interest rate adjustment could have no impact on financial investment. The assumption that households and businesses will adjust their investment behavior proportionate to a change in interest rate is no longer the absolute reality. Recent American research has challenged the efficacy of using interest rates as a monetary policy (Grier, Kevin & Shu 2010). The study showed that businesses invest when interest rates are high and less when interest rates are down. It concludes that market interest rates partially influence but do not necessarily impact business and household investment behavior. However, a firm’s profitability and stock performance impact business investment behavior, regardless of the prevailing monetary policy (Dehejia et al. 2012). According to The Economist (2014), rather than use interest rates, measures such as lowering taxes and a flexible regulatory framework are most likely to influence business investment rather than lower interest rates. When interest rates are reduced, poorly performing businesses do not invest, notwithstanding the government incentive. It means that drivers of business investment are more elastic than the economy. Several studies have shown that government fiscal policy has changed since the 1980s as investment levels have been on a steady decline. It’s against this backdrop that volatility and credit default swaps have minimal impacts on business investment decisions, even if it's a measure of corporate credit risk. The up and down movement in interest rates does not directly ...