The global economy and the stock-markets are reeling under a rough phase which has been a cause of worry for investors throughout the world and stockholdings (and selling) – public or private - have been discouraged due to higher inflation, protectionism and trade (and tariffs), higher oil prices and higher interest rate and expectations that could make the economies lose competitiveness and demand when the population growth rate too is going down, even when the real wages are lagging productivity and competitiveness and is holding demand and growth back, the lower wages have also lowered the population and demand and growth.
Higher interest rate and expectations in the US and higher interest rate and expectations in the emerging markets due to higher tariffs, higher oil prices and capital outflows and depreciation has a direct effect on investors, credit and business, but may increase exports through depreciation, which might further drag down real wages and demand and growth, global growth, too…
Higher borrowing cost could also lower real wages and incomes due to debt repayment and higher other prices and also reduces employment because of less investment, all due to higher borrowing cost which would reduce demand and prices and economic growth rate and expectations.
The bust period would long as long as the rate hike cycle continues and the boom would correspond to rate cut cycle which depends on the inflation or inflation target/band.
But, if we try to increase demand by lowering borrowing cost and prices the economy wide and increase competitiveness, also through increased productivity and supply of capital due to lower borrowing cost, would work same as external devaluation or depreciation and exports, it would increase the real wages which could increase domestic demand as well as the real exchange rate and exports, productivity, competitiveness and demand and economic growth rate would increase.
Moreover, lower borrowing cost is a potent tool to achieve full employment, but also increases supply and lowers prices due to lower borrowing cost, it would increase both demand and supply and trade would further help improve the cost of living, tariffs after full employment would increase inflation and interest rate and expectations, also due to higher nominal wages and wage cost inflation.
Lower prices and price expectations because of lower borrowing cost and inflation may delay spending and stockholding, people wait for the lowest prices to increase spending and stockholding as it increases real cash balances or real wages and incomes with the public when interest rate is cut low which increases demand and price and growth and expectations.
On the contrary if there are higher prices and price expectations because of higher borrowing cost, the real balance effect or real wages and incomes channel would not work since people would lower spending and the stockholding which would lower demand and price and growth expectations…
Therefore, from a policy perspective lower prices and price expectations could increase demand, price and growth and would prove to be expansionary than higher price and price expectations which discourage spending and stockholding *resulting-in lower prices and price expectations which could delay recovery from a slowdown.
Nonetheless, the job of the central bank is to find out for the natural or neutral real interest rate at which the economy is neither expansionary nor contractionary at full employment, also called the non-accelerating inflation rate of unemployment without producing the cycles, but the inability to control volatility in the prices through the borrowing cost or cost of capital either tightens too much or loosens too much resulting in trade cycles.
Nevertheless, lower prices and price expectations due to lower borrowing cost would increase demand and growth expectations through the real cash balance effect than higher price and price expectation which lower spending and stockholding and lower demand and growth expectations….
* correction
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