Why interest rate cuts may be ineffective in the new economy

This paper provides a theoretical explanation of the relationship between interest rates and stock prices in the ‘new economy’ using the investment opportunities approach for valuation of growth shares. First, it explains the creation of the bubble and the major reason for its bursting. Then, it discusses the benefits of interest rate cuts and why this might be ineffective in the ‘new economy’. Finally, it offers an alternative solution to the problem and the implications for investment portfolio management.