Abstract
Even though econometric models and yield curve analysis are useful in assessing the impact of interest rate changes on the economic structure, their power to predict the magnitude and direction of swings in the business cycle is often restricted to the use of short-term interest rates. From an Austrian school perspective on interest rates, empirical evidence suggests that the profitability of heavy industries further downstream outperforms that of light industries in the initial stages of monetary easing, due to a rising demand for investment goods and a rise in capacity utilisation levels. This paper assesses the impact of interest rates changes on the productive structure of the economy by taking into account the effect thereof on sector earnings and ultimately share prices.
Highlights
Conventional economic analysis assesses the impact of interest rate changes on the economy by evaluating its impact on the demand-side of the economy, and possibly potential output
Even though econometric models and yield curve analysis are useful in assessing the impact of interest rate changes on the economic structure, their power in predicting the magnitude and direction of swings in the business cycle is inferior and restricted to the use of short-term interest rates on their own
The remainder of this paper is devoted to assessing the effectiveness of conventional economic analysis and the Austrian microeconomic perspective as tools to predict the impact of interest rates on the business cycle of the economy
Summary
Conventional economic analysis assesses the impact of interest rate changes on the economy by evaluating its impact on the demand-side of the economy, and possibly potential output. Even though econometric models and yield curve analysis are useful in assessing the impact of interest rate changes on the economic structure, their power in predicting the magnitude and direction of swings in the business cycle is inferior and restricted to the use of short-term interest rates on their own. As yield curve analysis ignores the different interest rate elasticities of the individual GDP components, it is of little relevance for assessing the impact of interest rate changes on different types of investment on the various sectors in the economy and share prices This shortcoming can be accommodated in a microeconomic framework, which is the topic of the section
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