Risk-averse corporate investment behavior and the effectiveness of quantitative easing

Ying Wu

International Review of Economics & Finance, 2024, vol. 92, issue C, 1270-1286

Abstract: This paper analyzes how risk-averse investment behavior in a liquidity trap can render quantitative easing ineffective under certain circumstances. For risk-averse firms that could lever either a risky investment project or a riskless alternative, I show that the real interest rate responsiveness of a relative net investment return causes both the interest-rate sensitivity of investment and the slope of the aggregate demand (AD) curve to bifurcate. Except for the scenario of sufficiently low investment return and high real interest rates, investment is positively related to real interest rates and the AD curve is downward sloping; under the circumstances, quantitative easing backfires but laissez faire helps stimulate investment instead.

Keywords: Corporate investment; Risk aversion; Quantitative easing; Laissez faire; Aggregate demand (search for similar items in EconPapers)
JEL-codes: D81 E00 E22 E52 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:92:y:2024:i:c:p:1270-1286

DOI: 10.1016/j.iref.2024.02.042

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