Are Interest Rates Too Low?

An interesting op-ed piece in yesterday's Wall Street Journal by John Michaelson. He challenges the conventional wisdom that maintaining low interest rates is necessary to stimulate the economy. This is a conventional wisdom I have been questioning myself for awhile. In a recent post on three books I enjoyed reading, I noted that Rajan points out two negative effects of low interest rates--less income for people who own bonds and a tendency for investors to seek higher returns through leverage.

Michaelson argues that firms make investments based on increased demand much more than on relatively small changes in interest rates. He also argues that we have an example that shows the low-interest rate policy doesn't work--Japan. I find the article stimulating and worthy of consideration.