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.