In a message dated 12/7/03 4:03:55 PM, [EMAIL PROTECTED] writes: >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.
In other words, a person won't borrow even at a 0% rate of interest if he expects a negative rate of return were he to invest any funds he borrowed? DBL
