--- John Morrow <[EMAIL PROTECTED]> wrote:
> By the way, there have been times and places where the measured real
> interest rate was essentially zero; I think this happened in Japan in
> the 1990s.

So the question is, why at the zero rate was there not greater demand to
borrow?  The answer may well be that the expected future inflation and real
interest rates were highly uncertain, and the transaction costs of getting
and exiting from a loan were high, and there was a high level of risk
aversion.  What counts is not just the cost of borrowing but also the
expected return on the borrowings, and if business conditions are bad, then
the demand for loanable funds may be low because of uncertain earnings or
asset appreciation.  The inflation part of the nominal interest has to be
paid in actual dollars, and so high rates of inflation may well deter
demand.  A low real rate of interest induces more borrowing, other things
equal, but with higher inflation and greater business uncertatainty, other
things may not be equal.

Fred Foldvary

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