Central banks decrease sometimes the interest rate by saying this has positive effect on the economy and the development of countries.

One of the reasons is that it can be easier to do investments (business, government, etc.). Are there other reasons? And does somebody have deeper insights about doing this and the benefit of it?

(Of course there are also disadvantages and risk of doing this (but I am not interested in that for now))


There are many channels of monetary policy transmission. You could look that up more if you're interested. I'll point out some of them here.

  • Interest rate channel. This is pretty much what you mentioned in the question. The opportunity costs of borrowing money becomes cheaper, so private demand expands.
  • Asset price channel. With the lower rate, people find it more attractive to invest in other assets (as opposed to keeping money in the bank). The increased asset demand leads to an increase in equilibrium price, which increase wealth for those who are holding those assets, and more consumption due to the wealth effect.
  • Exchange rate channel. The lower interest rate would cause funds to flow out of the country (people searching for higher yield in other countries) causing the currency to depreciate. The depreciated currency helps exporters to be able to compete and export more.
  • $\begingroup$ The last two sound like effects that hurt the economy overall but improve certain metrics. Am I missing something? $\endgroup$
    – user253751
    Nov 28 '19 at 12:53
  • $\begingroup$ @Art why do so private demand expands? $\endgroup$ Nov 28 '19 at 15:09
  • $\begingroup$ @user253751 Regarding FX, t would lead to a fall in export prices (see here). $\endgroup$
    – Art
    Nov 29 '19 at 3:50
  • 2
    $\begingroup$ @jenniferruurs If you had an investment that would give you 3% return, you wouldn't take a loan that you have to pay 5% interest rate on it... but if the interest rate drops to 2%, then that investment becomes attractive. $\endgroup$
    – Art
    Nov 29 '19 at 3:51
  • 1
    $\begingroup$ This is getting long and I think it's a great question. Perhaps you could post it as a separate question? $\endgroup$
    – Art
    Nov 29 '19 at 13:20

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