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Why interest rate cuts may be ineffective in the new economy




This paper provides a theoretical explanation of the relationship between interest rates and stock prices in the ‘new economy’ using the investment opportunities approach for valuation of growth shares. First, it explains the creation of the bubble and the major reason for its bursting. Then, it discusses the benefits of interest rate cuts and why this might be ineffective in the ‘new economy’. Finally, it offers an alternative solution to the problem and the implications for investment portfolio management.

Suggested Citation

  • Tokic, Damir, 2003. "Why interest rate cuts may be ineffective in the new economy," Journal of Financial Transformation, Capco Institute, vol. 7, pages 13-16.
  • Handle: RePEc:ris:jofitr:1295

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    References listed on IDEAS

    1. Krishnamurthy, Arvind, 2003. "Collateral constraints and the amplification mechanism," Journal of Economic Theory, Elsevier, vol. 111(2), pages 277-292, August.
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    More about this item


    Interest rates; stock price movements; bubbles; investment management;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


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