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On the Relationship between the Money Rate of Interest and Aggregate Investment Spending

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  • Vedit Ä°nal

Abstract

Careful observers had already pointed out before the capital theory controversies that an investment demand schedule inversely responsive to the rate of interest is theoretically untenable. This implies that the weak empirical evidence showing the negative relation between aggregate investment spending and the rate of interest cannot be explained via the neoclassical investment theory. Assuming a short-run framework and concentrating on the “Sources and Uses of Funds Account,†it is shown here that the inverse relationship between the two variables derives, not from the investment demand function, but from the ability to finance investment spending. The explanation is valid only in the short run. In the long run, aggregate investment spending may rise, fall, or remain constant in response to a change in the rate of interest. JEL Classification: B51, E11, E22, G31

Suggested Citation

  • Vedit Ä°nal, 2024. "On the Relationship between the Money Rate of Interest and Aggregate Investment Spending," Review of Radical Political Economics, Union for Radical Political Economics, vol. 56(2), pages 300-318, June.
    • Handle: RePEc:sae:reorpe:v:56:y:2024:i:2:p:300-318
    DOI: 10.1177/04866134231207912
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    More about this item

    Keywords

    capital controversy; investment demand; investment finance; interest and investment;
    All these keywords.

    JEL classification:

    • B51 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Socialist; Marxian; Sraffian
    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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