It is helpful at certain points throughout one's study of economics to revisit the empirical data that seems to convince one of widely accepted macroeconomic theory. The focus in this article is on the theory between investment and interest rates. Because investment often depends on the borrowing of money, and the price of borrowed money depends on the interest rate, it is commonly believed that an increase in the interest rate should decrease investment.
To help illustrate this, I have juxtaposed a graph of the federal funds interest rate since 1955 with a graph showing the percent change in private fixed investment from the previous period (I have used the percent change rather than the absolute value to remove the effects of the continual upward trend of investment caused by GDP growth). The investment line has been shifted forward one year to account for lags in the effect of the interest rate. We can thus clearly see from the graph that, for the most part, investment and interest rate behave quite miraculously as expected.
The data for the interest rate is from the Federal Reserve website, and the private investment data is from the Bureau of Economic Analysis.
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