how do interest rates and inflation interact with each other in an open economy? What does a change in either mean for the other?
In: Economics
They don’t interact that much so you’re making a wrong assumption. However, a low interest rate means it’s cheaper to borrow money, so it can increase the amount of money the banks can create (yes, banks can create money out of thin air). This means more money is floating around and this can increase inflation.
But it doesn’t have to do that, as many other things can impact inflation. For example, the dollar has stayed high in value despite low interest rates because the dollar is a highly valued currency across the world for other reasons.
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