<p>One quick way to reason the negative correlation is the concept of Present Value (PV). An increase of interest rate reduces the PV of cash (in-)flows occurring in subsequent periods.</p>

<blockquote>
  <p>in the large, open economy model it is mentioned that higher interest
  rates encourage both domestic and foreign investors to lend in the
  country, so investment can increase?</p>
</blockquote>

<p>Yes, but that is because on the lender's side that leads to an <em>arbitrage opportunity</em> and/or a reduced <em>cost of opportunity</em>. Strictly speaking, high interest rates prompts lenders to <em>lend</em> money rather than to <em>invest</em> (or consume).</p>

CC BY-SA 4.0
2018-07-31T11:41:33.943Z
2018-07-31T11:41:33.943Z
Iñaki Viggers
<p>Having just begun self-studying economics, I apologise if this question is too simple.</p>

<p><strong>Do investments increase or decrease with increased interest rate?</strong></p>

<p>According to the small, closed economy model (as far as I understand it) increased interest rates make borrowing harder and hence crowed out investment.
However, in the large, open economy model it is mentioned that higher interest rates encourage both domestic and foreign investors to lend in the country, so investment can increase?</p>

<p>I appreciate that this boils down to a difference in foreign vs. domestic, and ultimately into the question wether investment is <strong>lending</strong> or <strong>borrowing</strong>. Anybody who could put me on the right track please? </p>

<macroeconomics><interest-rate><open-economy-macro>
Are Investments positively or negatively correlated with interest rate
Jhonny
# Are Investments positively or negatively correlated with interest rate

(Asked by: username_0 on 2018-07-30)

Having just begun self-studying economics, I apologise if this question is too simple.

**Do investments increase or decrease with increased interest rate?**

According to the small, closed economy model (as far as I understand it) increased interest rates make borrowing harder and hence crowed out investment.
However, in the large, open economy model it is mentioned that higher interest rates encourage both domestic and foreign investors to lend in the country, so investment can increase?

I appreciate that this boils down to a difference in foreign vs. domestic, and ultimately into the question wether investment is **lending** or **borrowing**. Anybody who could put me on the right track please?

**Tags:** macroeconomics, interest-rate, open-economy-macro

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## 1 answers

### Answer by username_1 on 2018-07-31. Score: 1 | Accepted answer

One quick way to reason the negative correlation is the concept of Present Value (PV). An increase of interest rate reduces the PV of cash (in-)flows occurring in subsequent periods.

> in the large, open economy model it is mentioned that higher interest
> rates encourage both domestic and foreign investors to lend in the
> country, so investment can increase?

Yes, but that is because on the lender's side that leads to an *arbitrage opportunity* and/or a reduced *cost of opportunity*. Strictly speaking, high interest rates prompts lenders to *lend* money rather than to *invest* (or consume).


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