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Which Interest Rate Seems Most Related to Business Investment? A Few Preliminary Findings from an Ongoing Study

Listed author(s):
  • John J. Heim


    (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)

This paper examines (econometrically) which interest rates seem most systematically related to investment and the GDP and how long the lag time is before changes in these interest rates affect the GDP. We conclude that the Prime interest rate has the most important and systematic influence on these variables and that it affects investment and the GDP after a two year lag due to the lengthy periods required to design, bid and build new factories, commercial facilities and some machinery. Other rates examined, but not found related to investment - triggered GDP growth, include the Aaa and Baa corporate bond rates, the Mortgage interest rate and the 10 year Treasury bond rate. Our results also suggest the magnitude of the effect of interest rate changes on the economy is relatively modest, and that therefore the Federal Reserve's ability to influence the economy by changing rates may also be somewhat constrained.

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Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 0708.

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Date of creation: Jul 2007
Handle: RePEc:rpi:rpiwpe:0708
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