Sticky Discount Rates

Masao Fukui, Niels Gormsen and Kilian Huber

No 20502, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We show that firms' nominal required returns (i.e., discount rates) are sticky with respect to expected inflation. Sticky discount rates generate distinct theoretical predictions that are broadly consistent with stylized empirical patterns: increases in expected inflation directly raise real investment; demand shocks generate investment-consumption comovement; and the sensitivity of investment to interest rates is low. Sticky discount rates imply monetary non-neutrality, even when all other prices are flexible, because of a direct link from expected inflation to investment. In the New Keynesian optimal monetary policy problem, the central bank steers long-run inflation expectations, even in response to temporary shocks.

Keywords: investment (search for similar items in EconPapers)
JEL-codes: E1 E2 E3 E4 E5 G1 G3 (search for similar items in EconPapers)
Date: 2025-07
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