Inventory investment and the rate of interest

Abstract

The article examines the relationship between business investment in inventory, one of the most powerful factors in the business cycle, and interest rates. The author shows that some of the assumptions underlying economists’ scepticism of the existence of appreciable interest elasticity of demand for inventories are not justified. Moreover, it is shown that some businessmen do take interest rate levels into consideration when fixing inventory targets. Finally, some evidence that high interest rates did restrain inventory investment in Great Britain and in the United States in the late 1950s when rate returned to pre-great depression levels is presented. While not conclusive, such evidence is sufficient to justify recalling attention to investigation of the possibilities for valuable anti-inflationary contributions from short-term interest rate policy.

JEL: E22, E32, E43, G31