In a recent interview [1] Dr. Andy Haldane said “Andy Haldane said low rates kept some ‘zombie’ firms alive, but the trade off was far more people stayed in work.A Bank modelling scenario found that years of 0.25% rates probably kept 1.5 million in jobs, he said in a speech.He would not have sacrificed those jobs for an extra 1% or 2% productivity”. Dr. Haldane would appear to believe that low interest rates somehow support marginal firms but there is no evidence for this. If one were to plot the rate of establishments going out of business over time and the Effective Federal Funds Rate, if Dr. Haldane were correct, there ought to be a positive correlation. As interest rates increase, businesses should collapse and vice versa. However the opposite is observed, there is a negative correlation.
The Bureau of Labor Statistics recorded the number of business "deaths" per quarter [2] while of course the Federal Reserve Bank (FRB) records the Effective Federal Funds Rate [3]. In the 85 quarters between 1993 and the first quarter of 2014, if a Pearson Product Moment Correlation (PPMC) were run, there would be a negative correlation (R2 = -0.343, p= 0.00131). In other words, as interest rates rose, the "death rate" of businesses declined and vice versa. A prima facie reading would be that raising interest rates prevent business deaths, not cause them. Conversely it is falling interest rates that are more generally associated with increases in business death.Now of course this is non-sense. In reality interest rates are strongly influenced by market forces. When demand for credit increases, the price of credit - interest rates - increase an vice versa. When more businesses are dying than being born, demand for credit is low and when new business formation rates exceed the extinction rate, demand for credit is high.
[1] http://www.bbc.com/news/business-39332826
[2] http://bit.ly/2kebsY7
[3] http://bit.ly/2nyZI7e
Table 1
Births, Deaths, and the Effective Federal Funds Rate
Category n Mean Standard Deviation
Births 88 213,659 13,488 Deaths 85 94,588 20,568 EFFR 89 2.89 2.28