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.
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