 Monetary easing, lack of investment and financial instabilityViral V. Acharya, Guillaume Plantin, Pietro Reggiani and Iris Yao Journal of Financial Intermediation, 2024, vol. 59, issue C Abstract: Low monetary policy rates lower the cost of capital for firms, thereby spurring productive investment. Low interest rates however can also induce the private sector to enter into risky carry trades when they imply that the earned carry more than offsets liquidity risk. Such carry trades and productive investment compete for funds, so much so that the former may crowd out the latter. Below an endogenous lower bound, monetary easing generates only limited capital expenditures that come at the cost of large and destabilizing financial risk-taking. Absent the ability to regulate carry trades, monetary easing must be complemented with a restrictive emergency-lending policy in the form of higher lending rates so as to discourage risk-taking by relatively illiquid firms. Monetary easing, tepid investment response, and rollover risk for liquid firms then arise jointly (and optimally) in equilibrium. Keywords: Monetary policy; Emergency lending; Financial stability; Financial fragility; Shadow banking; Carry trades; Rollover risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:59:y:2024:i:c:s1042957324000287 DOI: 10.1016/j.jfi.2024.101100 Access Statistics for this article Journal of Financial Intermediation is currently edited by Elu von Thadden More articles in Journal of Financial Intermediation from Elsevier |
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