Even though it may seem logical to reduce the interest rate during a slowdown to attract more investment, it may not be the most prudent decision when it come to foreign investment.
Consider a country say A that invests in America because it gets good rate of return in comparison to its own country. Say the roi in home country is 5% and that in America in 7%. So A would be tempted to invest in America. But if the rate of return fall to 5% in US, it may not be very wise to invest in US.
eg. say A is INDIA. want to invest 10000 Rs. 10000 rs is equal to 250 $ approx.
I invest 250 $ in US at 7% for 1 year. Interest is 17.5 $ = 700 rs.
I invest 10000 in India at 5% for 1 year. Interest is 500 rs. = 12.5 $
So makes more sense in investing in US. So even during the time of recession, to keep the foreign inflows coming should not reduce the interest rates drastically as done by Ben Bernanke.
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