Investment under uncertainty with a zero lower bound on interest rates

George Dotsis

Economics Letters, 2020, vol. 188, issue C

Abstract: This paper examines irreversible investment decisions when the interest rate is stochastic and constrained by a zero lower bound. In contrast to the commonly found negative relationship between investment and uncertainty, it is shown that the presence of a lower bound on interest rates induces an asymmetric effect of interest rate uncertainty on investment decision. When the interest rate is low an increase in interest rate volatility decreases the value of waiting and increases investment but when the interest rate is high an increase in interest rate volatility increases the value of waiting and decreases investment.

Keywords: Irreversible investment decisions; Zero lower bound; Shadow interest rate (search for similar items in EconPapers)
JEL-codes: G11 G12 G31 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:188:y:2020:i:c:s0165176520300082

DOI: 10.1016/j.econlet.2020.108954

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