Within an economy, there are different industries. and each industry would require a different central bank interest rate to function best. But there cannot be a different interest rate from a central bank for each and every industry.

What happened when Sweden raised its interest rate?

We hear that Sweden raised its interest rate a few years ago and their economy went into a recession. But here is Adair Turner from an interview with INET. (link) Listen to between 23:45 minutes and 26 minutes. In this space of time, he says…

“Essentially, the economy is not efficient and rational enough that we can assume that all sectors have the same concept of what the rate of return is… and therefore respond in an equal way to a rate of interest increase. We've seen this actually within the last few years in Sweden. 3 years ago back in 2011-2012 the Swedish central bank, Riksbank, was worried about a credit-asset price bubble getting going in Stockholm property in particular. It decided against the trend of central banks to raise its interest rate. It raised… didn't make a blind set of difference to the credit and asset price cycle in Stockholm, but what it did do was drive the Swedish economy into a recession.”

The implication of his words is that interest rates are set low enough that even the most marginal of industries will get a break. Thus interest rates have fallen to the level of the least healthy industries, while some industries benefit greatly from low interest rates.

So these questions then arise… Does any industry struggle with low interest rates? What industry might require a zero % interest cost? And are these industries then socially optimal?

Limits on Development

Even for those industries, like high-end housing, that might laugh at low interest rates because they could still do well with much higher interest rates, there are still limits to their investment, such as demand. They can only develop their investments within the limits of the demand in the market. So interest rate costs become a non-issue. They have all the money they would need to develop their investments. So interest rates are not a limiting factor.