Presently, the interest rate is a tool which is used by the monetary authorities to change the individual/firm’s decision about consumption and saving levels at any given time. But we have the cases where zero or near-zero interest rates fail to increase the inflation in the economic units. The proposed financial model will give a new tool to monetary authorities. New Financial Tool can be used along with interest rates to increase the demand in the economic unit, generate the employment and control the inflation as well.
Interest Rates' and New Financial Tool' Comparison below
Interest rates are used as a tool by central banks to influence the demand/consumption in an economic unit as a whole.
It can be positive/negative OR more/less from the base range as decided by the central bank according to the inflation and economic activity present in an economic unit.
It affects the economic unit as a whole, not only a specific sector.
As it is used to influence the demand and create the employment.
Risk of inflation/deflation remains high.
Interest rates influence the capital inflow and outflow in the economic unit.
It also affects the commodity and capital markets too much extent.
Interest rates are responsible (boom/bust) in the economic unit
New Financial Tool can also be used by central banks to spur the growth in of Economic unit.
Its effect will be only on the positive side. Can be used only to spur the demand in the economy.
It can be used to target a specific sector, having a positive effect on the economic unit as a whole as well.
It will be very effective for employment generation as specific sectors can be targeted.
The Risk of inflation/deflation won't be that high. It can be used to spur the demand and for Employment generation during high interest rate periods as well.
There won't be any effect on the capital inflow-outflow in an economic unit.
There will be long term and positive effects from this tool. Won't be immediate effects on Capital and commodity markets.
It won’t be responsible for the cycles in the economic unit.
Research Analyst (Certified)
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