Are higher interest rates going to crash the economy? A quick calculation suggests no

Even with inflation at 5%, some people believe that higher interest rates will crash the economy. Is this 2011 all over again1?

As I explained on Twitter, increases in debt servicing costs are small compared to rises of other production costs (e.g. labor). So if the economy does crash after rate hikes, it must be because of some other/indirect cause.

  1. “Intervening prematurely can however undermine credibility. Indeed, Stark presided over the ECB’s disastrous 2011 rate hike—quickly reversed—which dramatically worsened the eurozone crisis. Let us not make the same mistake again.”

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