These days, few people are calling for the Fed to raise interest rates. After all, the prevailing mainstream view championed by Wall Street is that rates should stay low to encourage investment. But University of Chicago economist Raghuram Rajan challenges this strategy. Taking on Paul Krugman, he argues the low rates may do more harm than good. Here's a taste of his logic:
The real problem is that corporations are not hiring quickly. But corporations did not hire quickly following the recession of 2001 (or that of 1990-91), and the sustained monetary stimulus that many economists supported then led, in no small part, to the housing boom and bust. It did not, however, lead to an explosion in corporate investment. Before saying the real problem is that we are not providing enough monetary stimulus, should we not worry about why corporations didn't invest then and what other problems will emerge as we keep rates ultra-low while hoping corporations will see the light? I am not arguing that ultra-low interest rates will have no effect on investment, only that I am not convinced the effect (relative to merely low interest rates) is huge, and recent history bears me out.
Read the full story at Freakonomics.
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