Traditional Culture Encyclopedia - Traditional festivals - Impact of interest rate on economy (impact of low interest rate on economy)
Impact of interest rate on economy (impact of low interest rate on economy)
The impact on leverage ratio: the interest rate drops, the cost of issuing new debt and repaying old debt decreases, and the debt repayment pressure is reduced, which is conducive to deleveraging. But it may also push the leverage ratio to rise further.
Impact on capital flow and exchange rate: According to exchange rate parity, due to the profit-seeking nature of capital, when there is a spread between the two countries, capital will flow into the country with high interest rate, which will make the currency appreciate in the current period, depreciate in the future and lower interest rate. Of course, because the major countries in the world are basically cutting interest rates, capital flows and exchange rates are also affected by factors such as expectations, so the impact of low interest rates on them is still inconclusive.
Impact on monetary policy space: According to Keynes's liquidity trap theory, when the interest rate level can't be lower, people will expect interest rates to rise, bond prices to fall, and the elasticity of money demand is infinite, so no matter how much money is added, it will be stored by people without stimulating investment and consumption, thus making monetary policy ineffective.
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