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Role of Interest Rates in Contemporary Economies - Research Paper Example

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The paper "Role of Interest Rates in Contemporary Economies" states that Interest rates play an important role in business fluctuation as an instrument of monetary policy.  Central Bank through its Quantitative Credit measures checks inflationary trends and strives to bring stability in the economy…
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Role of Interest Rates in Contemporary Economies
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Download file to see previous pages All the monotheistic religions i.e. Judaism, Christianity and Islam looked interested with contempt; where the Judaism and Christianity compromised with its significance as stimulating force for economic prosperity, Islam still treats it as a ' war against God' and practising Muslims dislike the lending and receiving of interest. In our early history, the Greeks were considered a highly civilized nation. Lending money at interest was forbidden by the Greeks. Aristotle whose powerful indictment greatly influenced the later nations condemned the taking of interest in very strong words. He compared money to a barren hen which laid no eggs. According to Aristotle, the object of the use of money was to facilitate exchange, and the fuller satisfaction of human wants. According to him, this was the most natural purpose of money; money could not be used as the source of accumulation i.e. to increase at interest. So accumulating money at interest was the most unnatural of all ways of making money. A piece of money cannot beget another piece, and hence it was unjust. Plato too condemned interest. Similarly, the Roman Empire prohibited the charging of interest, and they were the first nation to enact laws for the protection of debtors. Gradually prohibitions against usury began to be renewed in Europe. In England, the ban was renewed in 1545, during the reign of Henry VIII. It was only during this period the word usury began to be replaced 'interest'. (Homer 1996)
The Prerequisites to the Rise of Interest Rate:
In the underdeveloped economies, the demand for capital is great while the supply is very limited as compared with developed economies. The marginal productivity of capital is very high in developing countries and hence the rate of interest is also high. Some political factors also contribute to a high rate of interest in poor countries. As a high risk of bankruptcy is involved the higher rates of interest are claimed by the lending agencies.
Where there are possibilities that capital would earn a greater reward for the investor, he will be willing to pay the higher rate of interest keeping in view the higher degree of capital productivity and better power of payment of interest. In such situation, the rate of interest will rise.
When a loan is required for a longer period the money lender would prefer to advance loans to debtors at a higher rate of interest as the money lender/creditor have to part with their cash assets for a long period which involves greater risks than the short term loans.
Increase in trade and business activities creates a healthy atmosphere and it also creates demand for capital to a greater extent and in such circumstances, the expectation of the higher rate of interest cannot be ignored. The rate of interest will rise due to the excessive demand for cash resources.
When the economy is under inflationary pressure, it is indicative of the fact that the higher rate of interest prevails in the economic activities of a country. In such situation, the interest rates will also rise. ...Download file to see next pages Read More
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