The Effects on Investment Behavior of Zero Interest Rate Policy¡ªEvidence From a Roulette Experiment

Christian A. Conrad

Applied Economics and Finance, 2019, vol. 6, issue 4, 18-27

Abstract: This paper examines the effects of interest rate cuts on investment behavior. The methodology is to simulate investment decision making under different capital costs. The experiment showed that decreasing interest rates encourage risk-taking. With the decreased interest rate as borrowing costs the risk taking increased weakly but continuously. The risk taking increased strongly when the interest rate reached zero. Thus the experiment showed excessive risk-taking when there were no capital costs. This finding supports the hypothesis that extreme expansive monetary policy with low, zero or negative interest rates encourage financial bubbles and overinvestments or wrong investments in the real economy.

Keywords: quantitative easing; anticyclical monetary policy; monetary business cycles; financial crisis policy; zero interest rate policy; experimental simulation with roulette (search for similar items in EconPapers)
JEL-codes: E43 E47 E58 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rfa:aefjnl:v:6:y:2019:i:4:p:18-27

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