Casey b. Mulligan is Professor of Economics at the University of Chicago.
Short-term interest rates have an obvious effect on the housing market, but the rest of the economy.
The Federal Reserve policy affects bank regulation short-term interest rates and inflation. I will write to the week next inflation, and my colleague blogger from Economix Simon Johnson has written much about bank regulation, now that I am focusing on short-term interest rates.
The Federal Reserve, including its New York branch, is actively engaged in the purchase and sale of Treasury securities, and it lends money to banks based on the day the day. Accordingly, it is generally considered that the Federal Reserve is a determinant of the rate of interest paid on short-term Treasury securities.
By reducing the purchase of Treasury and loans offer day day, called "sa," monetary policy raises short-term interest rates. High short-term interest rates are said to discourage borrowing, reducing private investment projects. The idea is that private sector projects are undertaken only when their anticipated return exceeds the cost of borrowing.
In theory, result of short-term interest rates high in investment projects relatively little, with expected high returns and low rates result in the short term in several capital projects, including those with yields expected lower.
But the effect of the high interest rates in the short term on the economy of Main Street has been exaggerated. Is generally assumed that the current low rates should help strengthen a takeover of, but it seems that the conditions of the company actually not have much to do with short term money markets.
Many investment projects important private sector are relatively long term - is more likely to take a year or more for a project to complete and deliver positive cash flows to investors. As a result, many capital projects are funded by long-term borrowing, with the equity financing, or of companies profits not distributed, rather than borrowing on the market in the short term where the fingerprints of the Fed are so obvious.
In theory, long-term interest rates could increase while the Fed tightens monetary market in the short term, because some savers would be on the margin of save in two markets in the short or long term. Capital markets equity and retained earnings, in theory, could also subject to similar indirect effects.
Thus, the effects of the policy interest rate of Federal Reserve investment are indirect, and it is an empirical question as to whether the effects expected - tight money discourages investment projects - are significantly reflected in the prevention of capital with low expected returns projects.
Luke Threinen and I measured the national average profitability of capital projects of the national accounts, dividing the total interest and profits in the economy for a year by the stock of total capital in place at the beginning of the year. In so doing, we have distinguished residential capital (i.e. houses) capital of the company.
Produced capital value on a number of years. In the case of capital housing, the value is in the form of a dwelling and the convenience of a home. For any piece of capital, profitability (marginal product of capital, as economists say) can be calculated as the value of the dollar it creates during a year - after subtraction of depreciation, fees work, maintenance and intermediate goods hand - per dollar invested.
The capital owners prefer their capital to be more profitable, not less. It is the profitability of capital (after tax and grants, information on those below) which makes it an owner willing to buy the capital in the first place.
Table 1 compares the profitability of capital housing for the return of corrected for inflation on the one-year Treasury bills (for the comparability with the good profitability of housing is adjusted for property taxes). Compatible with the view that monetary policy increases the rate of the Treasury bills and reduced real estate investment, the two series are positively correlated. The home mortgage market seems closely linked, this high rate of Treasury bills cause banks to demand more loans mortgages home that discourages owners and the owners of the construction of houses that the demand for houses is sufficient (i.e.)(, owners can earn rent for their tenants to cover a high rate of mortgage).
Among other factors, Federal Reserve credit facility in the early to mid 2000's made easy to buy and build houses, and that the inventory of houses has increased the amount of rent that each House could win (many homes alla vacantpar example) fellshown in chart 1 as particularly low values of the Red series. In this way, the cycle of the 2000s housing confirms that the usual story about monetary policy how can affect real estate investment.
The usual story on political investment and Affairs of the Federal Reserve said that a similar process works on the business sector: high Treasury bill rates cause banks to pay more for loans to businesses, which discourages firms to invest unless there is sufficient demand for their product (c. - to-d .entreprises can earn enough) (benefits of their operations to cover a rate high loan).
Our results for the business sector are very different from the usual story. Graph 2 compares the profitability of the capital of the company for the return of corrected for inflation on the Treasury bills, and the correlation is negative.
One way that the easy monetary policy could hurt business investment is to promotes home-construction activity and construction of houses takes resources for the construction of the company.
In tables 1 and 2 evidence suggests that the housing market may be stimulated by easier monetary policy, at least in the short term. But the link between monetary policy and the business sector is much lower, and our data are consistent with the idea that, holding constant the rate of inflation and the amount of banking regulation, monetary policy is not a discernible effect on the cost of capital of the company.
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