Why Is Economic Stimulus Using Low Interest Rates A Fantasy Or Reality?

Economic stimulus using low interest rates – a fantasy or reality?
Low interest rates are observed in developed economies as an attempt to discourage savings and encouraging borrowing from banks or other financial institutions . It further aims to create wealth for citizens, while boosting consumer and investor confidence. The economy is believed to grow and inflation to increase when interest rates are low. On the other hand, high interest rates cause consumer spending to decrease, putting a hold on economic growth while decreasing inflation. However, interest rates are not the sole determinant of economic growth. The question therefore arises whether low interest rates as instrument of economic stimulus are is a fantasy or reality.

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Firstly, low interest rates causes consumers have more money to spend in the economy . The reason for this is because bank repayments are lower and therefore consumers have more money to spend in the economy. Furthermore, with interest rates being low, businesses are able to finance new spending on capital goods. When interest rates are lower, consumer spending in vehicles and housing increases . As the demand for the assets increase (subsequently causing an increase in inflation), it results in an increase in assets. This is considered to have two effects – while increasing the wealth of households, it also encouraging consumers to borrow more and causes debt to increase. Higher debt levels make it difficult to increase interest rates as it will have dire consequences on the economy. Furthermore, with interest rates being low, businesses are able to finance new spending on capital goods. Lastly, low interest rates lead to an improvement in balance sheets and banks’ capacity to lend finances
As the demand for the assets increase (subsequently causing an increase in inflation), it results in an increase in the value of the assets. This is considered to have two effects – while increasing the wealth of households, it also encourages consumers to borrow more and causes debt to increase. Higher debt levels make it difficult to increase interest rates as it will have dire consequences on the economy Despite the banks benefiting the most from the ultra-low interest rates, individuals who save or are pensioners have been affected severely . . Due to the reduction in interest rates, pensioners that rely on savings receive a lower income. This is particularly concerning aswhen pension cost of goods increase, which places them in a damaging situation. Companies are also now responsible to provide workers with pension schemes. This causes a reduction in “investment” in the company. Due to the reduction in interest rates, pensioners that rely on savings receive a lower income. This is particularly concerning as pension costs increase, which places them damaging situation. SecondlyThirdly, banks increase their risk as they the borrow funds to individuals who have lower credit scores and poor credit histories . It can be seen that banks do not consider these risks of additional costs when they provide funds to these individuals. Maddaloni & Peydró found that weaker lending standards,