Monetary Easing, Leveraged Payouts and Lack of Investment

Viral Acharya and Guillaume Plantin

No 26471, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies a model in which a low monetary policy rate lowers the cost of capital for entrepreneurs, potentially spurring productive investment. Low interest rates, however, also induce entrepreneurs to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit entrepreneurs, they come at the social cost of reducing their incentives thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, due to the presence of a shadow-banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first-best. The optimal monetary policy may even consist of “leaning against the wind,” i.e., not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency.

JEL-codes: E52 E58 G01 G21 G23 G28 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
Note: CF ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: Monetary Easing, Leveraged Payouts and Lack of Investment (2022)
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