Monetary Easing, Leveraged Payouts and Lack of Investment / Viral V. Acharya, Guillaume Plantin.

Format:

Book

Author/Creator:

Acharya, Viral V.

Contributor:

National Bureau of Economic Research.

Plantin, Guillaume.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26471.

NBER working paper series no. w26471

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

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.

Notes:

Print version record

November 2019.