Monetary Easing, Investment and Financial Instability

Guillaume Plantin and Viral Acharya

No 13072, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies a model in which a low monetary policy rate lowers the cost of capital for firms, thereby spurring productive investment. Low interest rates however also induce firms to lever up so as to increase payouts to shareholders. Such leveraged share buybacks 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.

Date: 2018-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: Monetary Easing, Investment and Financial Instability (2019)
Working Paper: Monetary Easing, Investment and Financial Instability (2018)
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