Monetary Easing, Lack of Investment and Financial Instability

Viral Acharya, Guillaume Plantin, Pietro Reggiani and Iris Yao

No 13072, CEPR Discussion Papers from Centre for Economic Policy Research

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 limited lender-of-last-resort (LOLR) 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 (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 G21 G23 G28 (search for similar items in EconPapers)
Date: 2018-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://cepr.org/publications/DP13072 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13072

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP13072

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().