--- 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 ===== [EMAIL PROTECTED]