The theory goes that lowering interest rates allows people to borrow more and this stimulates consumption. However, as I mentioned in another thread low interest rates allow people to hold onto non perishable goods longer. The consequences is a surplus of vacant houses and excess inventory. Consumption is primary driven by both the quantity and quality of employment. Any changes in consumption which result from changes in debt burden are purely transitory. In David Cass & Menahem Paper A Re-Examination of The Pure Consumption Loans Model they show that if the interest rate is less then then growth rate then this is a suboptimal situation because it is possible for all parties to consume more. How might we interpret this model in the case of capital formation. Perhaps we could conclude that the real interest rate should be equal to the rate of real GDP growth. The real GDP growth can be scene in the flowing graph: http://scottgrannis.blogspot.com/2010/05/10-gdp-output-gap.html As for the real interest rate I'm having trouble in getting a good standard number. A graph for the funds rate is shown bellow and is zero or bellow from the period of 2000 to 2006. I suspect if I looked at the real prime interest rate and the real mortgage rates it would be closer to 6% but if you subtract the risk premium perhaps it would be closer to the 3%. http://www.marketoracle.co.uk/Article4386.html It is clear that at least in terms of short term borrowing some institutions can borrow much cheaper in real terms then the growth in GDP but I'm not yet sure of the implications of this on the wider economy.