Essays on Relationship between Interest Rates and Investment Essay

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The paper “ Relationship between Interest Rates and Investment” is a cogent variant of the essay on finance & accounting. The aim of this paper is to explore the short-term and long-term determinants of interest rates across different economies in greater detail, with a particular focus on the relationship between variations in interest rates and investment. It is based on the assumption that real interest rates are inversely related to investment. It analyzes the factors that are responsible for changes in real interest rates  and the impacts that these changes have on investments in the world’ s economies.

It also investigates whether nominal interest rates or real interest rates(or both) are responsible for changes in investment. IntroductionThe level of investment in an economy varies with changes in various determinants. These determinants include the expected return on investment, business confidence, changes in national income, and interest rates. This essay seeks to investigate the influence of interest rates on investment and the relationship between the two across different economies. Is the relationship positive or negative? Are both nominal and real interest rates responsible for changes in investment or is it only real interest rates that have an influence on investment? A majority of today’ s empirical research and subsequent evidence on the determinants of real interest rates and its impacts on investment finds its roots in the extraordinary rise of rates in the early 1980s.

One such analysis revealed that investment might have some impact on interest rates (Qing & Chong), while another, that the changes in interest rates have a sure effect on investment (Ingersoll & Ross). An investigation on the effect of changing rates on irreversible investment revealed a positive or negative effect on demand for investment by the changes in interest rate.

(Alvarez & Koskela). While some scholars came to the conclusion that interest rate and investment were positively linked, others, using the VAR model, argued that interest rates had zero impact on investment (Dore). Even though the United States’ move to adopt a tight monetary policy is what triggered the initial surge, the effects of the adopted policy ended up being long-term, contrary to the expectation that they would only be short-term.

Works Cited

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Albu, Lucian-Liviu, “Trends in the Interest Rate – Investment – GDP Growth Relationship.” Romanian Journal of Economic Forecasting. 2006

Alvarez, Luis H.R., Koskela, E.,“Irreversible investment under interest rate variability.” 0404007, EconWPA. 2004

Barro, Robert J., & Xavier Sala-i-Martin,“World Real Interest Rates,” in NBER Macroeconomics Annual, edited by Olivier J. Blanchard, and Stanley Fischer: 15-61. Cambridge: MIT Press.1990

Blanchard, Olivier, & Lawrence Summers,“Perspectives on High World Real Interest Rates”,Brookings Papers on Economic Activity, 1984:2: 273-334.1984

Dore, Mohammed, Makken, R., Eastman, E., “The Monetary Transmission Mechanism, Non-residential Fixed Investment and Housing.”Atlantic Economic Journal, International Atlantic Economicvol. 41(3), 215-224. 2013

Ingersoll, J., Ross, E.,“Waiting to Invest. Investment and Uncertainty.”Journal of Business, Vol 65, p. l-29. 1992

Tejvan, Pettinger, “Effects of raising interest rates.” Economics Help. 2016

Qing, Meng & Chong, Y. K.,“Investment, interest rate rules, and equilibrium determinacy.”Economic Theory, Vol 23, p. 863-878. 2004

Uddin, M. G. S. & Alam, M. M., “The Impacts of Interest Rate on Stock Market: Empirical Evidence from Dhaka Stock Exchange.”South Asian Journal of Management and Sciences, 1(2), 123-132. 2007

Wuhan, Li Suyuan, &Khurshid Adnan, “The effect of interest rate on investment; Empirical evidence of Jiangsu Province, China”,Journal of International Studies,Vol. 8, No 1, pp. 81-90. DOI: 10.14254/2071-8330.2015/8-1/7. 2015

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