To enlighten our readers on the issue of interest rates, here's a little explanation about the relationship between interest rates, prices and value of money. It may be useful for understanding the debate about the ECB.
Central Banks are in charge of money creation, it is they who decide money supply into circulation.
The role of central banks is to control the rate, ie the cost of credit applied to commercial banks to refinance with the Central Bank.
This rate affects the interest rate that commercial banks apply to borrowers economic agents (firms and individual consumers).
Generally, when interest rates rise, the demand for loans is less important. A drop in demand for money implies that the Central Bank will inject less money in the economy. And like everything that is rare is expensive, the value of money increases. Hard Currency = high interest rates.
Conversely, when interest rates fall, borrowers ask for more money. So the Central Bank will inject more money into the economy. The currency is cheaper, but as the money is more important, for this money flows prices rise. This is inflation.
But it is clear that inflation is not a given either, it is always liaise with the money. The problem of purchasing power depends more on the relationship between inflation and money available to people (salaries, which are a share of value added created by enterprises, loans) and inflation itself.
In fact, the choice between a high interest rate and a low interest rate depends on the vision we had to finance the economy.
A high interest rate, as in Europe, encourages owners of capital, and therefore attracts those owners who want the best possible compensation. A high interest rate corresponds roughly to a liberal vision of the economy, which considers that it is the owners financial capital (the annuitant) which invest primarily to promote economic activity.
A lower interest rate encourages borrowing, and a company that borrows also creates investment for the future, and contribute to increased economic activity. But states can also borrow from central banks, a lower interest rate also promotes public investment. This corresponds rather to a Keynesian view of the economy (so-called theory of the welfare state).
course, things are more complex in reality and the interest rate is not the only variable to consider, but it depends on what are deemed most important to encourage investment and economic activity: Is this what are the holders of capital where the actors of the economy " true "that promote more investment and creating economic activity?
Knowing this, it's up to you to make your own opinion.
Central Banks are in charge of money creation, it is they who decide money supply into circulation.
The role of central banks is to control the rate, ie the cost of credit applied to commercial banks to refinance with the Central Bank.
This rate affects the interest rate that commercial banks apply to borrowers economic agents (firms and individual consumers).
Generally, when interest rates rise, the demand for loans is less important. A drop in demand for money implies that the Central Bank will inject less money in the economy. And like everything that is rare is expensive, the value of money increases. Hard Currency = high interest rates.
Conversely, when interest rates fall, borrowers ask for more money. So the Central Bank will inject more money into the economy. The currency is cheaper, but as the money is more important, for this money flows prices rise. This is inflation.
But it is clear that inflation is not a given either, it is always liaise with the money. The problem of purchasing power depends more on the relationship between inflation and money available to people (salaries, which are a share of value added created by enterprises, loans) and inflation itself.
In fact, the choice between a high interest rate and a low interest rate depends on the vision we had to finance the economy.
A high interest rate, as in Europe, encourages owners of capital, and therefore attracts those owners who want the best possible compensation. A high interest rate corresponds roughly to a liberal vision of the economy, which considers that it is the owners financial capital (the annuitant) which invest primarily to promote economic activity.
A lower interest rate encourages borrowing, and a company that borrows also creates investment for the future, and contribute to increased economic activity. But states can also borrow from central banks, a lower interest rate also promotes public investment. This corresponds rather to a Keynesian view of the economy (so-called theory of the welfare state).
course, things are more complex in reality and the interest rate is not the only variable to consider, but it depends on what are deemed most important to encourage investment and economic activity: Is this what are the holders of capital where the actors of the economy " true "that promote more investment and creating economic activity?
Knowing this, it's up to you to make your own opinion.
0 comments:
Post a Comment