March 22, 2019

What if All the World’s Economic Woes Are Part of the Same Problem?

The implication of this new body of research is that the global economy, like that troubled person, needs a lot of different types of help all at the same time.

But for now, the challenge is just to understand it.

Atif Mian, an economist at Princeton, was recently having dinner with a colleague whose parents owned a small hotel in Spain. The parents had complained vociferously, Mr. Mian recalled the friend saying, about the European Central Bank’s low interest rate policies.

That didn’t make sense, Mr. Mian thought. After all, low interest rates should make it easier for small business owners to invest and expand; that’s one of the reasons central banks use them to combat economic weakness.

The owners of the small hotel didn’t see it that way. They thought that big hotel chains were the real beneficiaries of low interest rate policies, not a mom-and-pop operation.

Mr. Mian, along with his Princeton colleague Ernest Liu and research partner, Amir Sufi at the University of Chicago, tried to figure out if the relationship between low interest rates and business investment might be murkier than textbooks suggested.

Imagine a town in which two hotels are competing for business, one part of a giant chain and one that is independent. The chain hotel might have some better technology and marketing to give it a steady advantage, and is therefore able to charge a little more for its rooms and be a little more profitable. But it is basically a level playing field.

When interest rates fall to very low levels, though, the payoff for being the industry leader rises, under the logic that a business generating a given flow of cash is more valuable when rates are low than when they are high. (This is why low interest rates typically cause the stock market to rise.)

Article source: https://www.nytimes.com/2019/03/05/upshot/what-if-all-the-worlds-economic-woes-are-part-of-the-same-problem.html?partner=rss&emc=rss

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