I had cited this paper several times in my articles, papers and use it extensively in my courses. Interest rates hardly matter for investment decisions except when they are too high. Hurdle rates do not change much for small rate changes. That was evidence from America.
Liaison and survey evidence indicate that Australian firms tend to require expected returns on capital expenditure to exceed high ‘hurdle rates’ of return that are often well above the cost of capital and do not change very often. In addition, many firms require the investment outlay to be recouped within a few years, requiring even greater implied rates of return. As a consequence, the capital expenditure decisions of many Australian firms are not directly sensitive to changes in interest rates. Furthermore, although both the hurdle rate of return and the payback period offer an objective decision rule on which to base expenditure decisions, the overall decision process is often highly subjective, so that ‘animal spirits’ can play a significant role.
Really, it opens up many questions on central banking (particularly in advanced nations) and their elaborate pretensions to doing something very important.
Earlier, George Cooper argued elegantly that well-functioning market economies do not need central bankers to target inflation. Market forces will do the job (“The origin of financial crises”, 2008)
With respect to the economic cycle, central banks do an elaborate job of raising and lowering interest rates by 25 basis points or 50 basis points, etc.
To be sure, animal spirits need to be revived in a downturn. Governments can do that job. Some good jawboning would work? Time-bound and targeted tax reliefs and subsidies?
With all their self-importance, modern central banking (has been in the service of financial markets. It takes care of their post-central banking career, speaking engagements and book contracts.
In reality, they should be ensuring financial stability and hence, economic stability. If they do, they would be hurting the financial services industry and its short-term fortunes, profits and executive compensation. Buddies would not be buddies anymore. Friendships formed in Universities would be in vain. They won’t help to secure chunky speaking fees.
So, in the name of the economy, of labour, central bankers of advanced nations (with Federal Reserve being the principal villain) continue to serve the most unproductive and predatory capitalists – the financial markets and the financial services industry!
Clearly, this is one swamp that Trump has to drain. That looks like a long shot though.