Munich Personal RePEc Archive

Is interest rate still the right tool for stimulating economic growth ? evidence from Japan

Al-Dailami, Mohammed Abdullah and Masih, Mansur (2017): Is interest rate still the right tool for stimulating economic growth ? evidence from Japan.

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A lot of advanced economies have reached a stage of stale economic growth and very low inflation rates or even occasionally deflation. Their policy maker’s response was to stimulate the economy through monetary easing in order to make funds available for potential businesses to borrow and grow. Countries such as Japan for example have reduced their interest rates to negative nominal rates in order to try to push the money back into the economy but so far all efforts were futile. This calls for a relook at the real situation and whether interest rates are actually the right tool to stimulate the economy or not. This paper takes a completely different perspective on economic development and attempts to discover the relationship between interest rates and entrepreneurship indicators in Japan with the latter being taken as a proxy for economic development as it is a major driver for economic activity – a proxy that was totally neglected by previous literature. The study performs a time series regression to determine the relationship between interest rates and four drivers of entrepreneurship in order to determine whether interest rates actually stimulate these or not. The study showed that interest rates are rather a driven factor, not a driver when it comes to entrepreneurship and efforts done on interest rates won’t have an impact on the real economic entrepreneurship.

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