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Economic Perspectives, Vol. 28, 4th, No. 4, November 2004
Interest rates and the timing of new production
Policymakers are naturally interested in the effects of interest rates on various economic activities. This article studies how interest rates affect entrepreneurs’ propensities to initiate new projects. Since the implementation of new ideas and production techniques is an important engine driving long-run economic growth, the effect of real rates on this activity should be of particular interest. This article illustrates that the effect of interest rates on the incentives to implement is not monotonic. Starting at high interest rates, a fall in the interest rate will spur entrepreneurs to implement projects more rapidly. But lowering interest rates even further will only persuade entrepreneurs to delay.
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