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Why companies invest more when interests are high

October 12, 2007
Raj Chetty was educated at Harvard, where he received his PhD in 2003; the same year he became an assistant professor at Berkeley at age 23. He was promoted to associate professor in 2007. George Akerlof, the Berkeley professor who won the Nobel Prize for Economics in 2001, describes Dr Chetty's work in the area of unemployment as 'revolutionary' and a very big innovation in the theory of unemployment.'

Dr Chetty won the 2005 Smith Richardson Public Policy Research Fellowship and has received three multi-year National Science Foundation grants, including, most recently, a Career Grant in 2006. Dr Chetty was a sophomore at Harvard when he came up with the theory that higher interest rates sometimes lead to higher investment. According to conventional wisdom firms invest less when rates rise because the higher rates increase the cost of capital. But he discovered some companies invest more because they want to get revenue-generating projects off the ground sooner so that they can recoup the investment.

'That idea was so compelling that economist Martin Feldstein, who had been using Chetty to help with his own research, told him instead to go off and pursue his own idea,' according to The American magazine which ran a story recently on Professor Chetty. It was called The Experimenter, referring to the experiments he conducts. 'A professor likes nothing better than to have a brilliant research assistant,' says Feldstein.' But I realised Raj was quite unusual. His sophistication and ability to work through problems were just higher than even the best of undergraduates at Harvard.'

Chetty speaks to Arthur J Pais.

Photographs: AFP/Getty Images

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