The Investment-Finance Link

The author of this brief offers evidence that policies aimed at stimulating private sector investment through interest rate reductions are, at best, misguided. He concludes that, while there may be benefits from policies aimed at increasing saving or lowering the budget deficit, a higher level of business investment is not one of them. Rather, because of the sizable effects of the business cycle and financial channels on investment, such a program will weaken the economy in the short run and curtail investment, with lower interest rates having little counteracting effect. A similar argument can be made about programs that attempt to reduce interest rates by promoting a rise in saving. If policymakers aspire to raise investment, they should look to actions that affect firms’ access to internal finance directly, such as an investment tax credit.