Low-interest rates may do less to boost business spending in today's economy than in years past because the big companies that now dominate many industries tend to use their money on intangibles that do not get cheaper as borrowing costs fall.
That is the conclusion of a research paper presented on Friday to global central bankers gathered in Jackson Hole, Wyoming that aims to explain why super-low interest rates put in place in the 2007-2009 financial crisis failed to lift business spending as much as expected, resulting in slower than forecast economic growth.
The paper, like others presented at this annual economic symposium, will not have any short-term impact on plans by the Federal Reserve and other central banks to keep raising rates so as not to allow the US and other big economies to overheat.
But it could shape how the Fed and others approach the next recession if the authors convince policymakers that cutting rates pack less punch in a world where a small number of giant firms like Apple and Amazon increasingly dominate their respective industries.
Those companies have built their market heft less by investing in plants and equipment than by spending on software, processes, and brands, which can not be as easily financed by debt, the authors of the paper wrote. Low-interest rates, in other words, may matter less in a world dominated by fewer, bigger companies that are based more on technology than machines.
"To the extent that shifts in market structure and market power are indeed attributable to intangible investment, policy should focus on other levers than interest rates, such as strengthening competition regulation and intellectual property rights enforcement, and encouraging the development of markets for intangible assets," wrote Northwestern University professors Nicolas Crouzet and Janice Eberly.