Do interest rates impact economic growth?
Searched over 200M research papers
Summary
10 papers analyzed
Some studies suggest that higher interest rates negatively impact economic growth, while other studies indicate that low interest rates are crucial for developing nations and that interest rates have a significant long-run relationship with economic growth in certain regions.
Consensus Meter
18 papers analyzed
Yes - 100%
Possibly - 0%
No - 0%
Research summarized with Copilot
Beta19 papers analyzed
Introduction
The relationship between interest rates and economic growth is a critical area of study in economics. Interest rates, which are the cost of borrowing money, can influence various economic activities, including investment, consumption, and savings. This synthesis aims to analyze the impact of interest rates on economic growth based on multiple research papers.
Key Insights
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Negative Impact of High Interest Rates on Economic Growth:
- High interest rates generally have a negative impact on economic growth by increasing the cost of borrowing, which reduces investment and consumption .
- In transitory economies, high real interest rates negatively affect economic growth through multiple channels such as local and foreign investments, human capital, and trade openness.
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Mixed or Indirect Impact:
- Some studies suggest that the relationship between interest rates and economic growth is not straightforward. For instance, in India, interest rates do not have a direct impact on growth but may have an indirect adverse effect through the transmission channel of bank credit.
- In some developing countries, the nominal interest rate does not significantly affect economic growth, but the real interest rate does.
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Policy Implications:
- Lowering interest rates can be beneficial for economic growth, especially in developing and transitory economies, as it encourages investment and consumption .
- Policymakers should consider the dynamic long-run linkage between interest rates and economic growth when making decisions to facilitate economic growth and stability.
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Contrary Findings:
- Some research indicates that reducing interest rates does not necessarily lead to higher economic growth, challenging many theoretical assumptions.
Conclusion
The impact of interest rates on economic growth is multifaceted and varies across different economic contexts. Generally, high interest rates tend to hinder economic growth by increasing borrowing costs and reducing investment. However, the relationship is complex and can be influenced by various factors such as the quality of credit disbursal, the economic structure, and the specific conditions of developing or transitory economies. Policymakers should carefully consider these dynamics when setting interest rates to promote sustainable economic growth.
Sources and full results
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