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Monetary policy actions and the incentive to invest

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Author Info
William R. Emmons
Frank A. Schmid

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Abstract

The ability of monetary policy actions to affect the private sector's incentive to invest in fixed capital is hotly debated. Whereas a downward shift in the yield curve increases the present value of expected cash flows and should spur investment, lower short-term interest rates make delay more desirable. These influences work against each other so the net effect of stimulative monetary policy actions could go either way. This article outlines a simple investment decision rule that captures both effects of changing interest rates. It also clarifies why monetary policy actions that shift the yield curve may or may not affect fixed investment.

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File URL: http://www.stlouisfed.org/banking/pdf/SPA/SPA_2004_03.pdf
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Paper provided by Federal Reserve Bank of St. Louis in its series Supervisory Policy Analysis Working Papers with number 2004-03.

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Date of creation: 2004
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Handle: RePEc:fip:fedlsp:2004-03

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Keywords: Monetary policy;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
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  2. Jonathan B. Berk, 1999. "A Simple Approach for Deciding When to Invest," American Economic Review, American Economic Association, vol. 89(5), pages 1319-1326, December. [Downloadable!] (restricted)
  3. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April. [Downloadable!] (restricted)
  4. Brian Sack, 2000. "Deriving inflation expectations from nominal and inflation-indexed Treasury yields," Finance and Economics Discussion Series 2000-33, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Frank A. Schmid, 2003. "Does the TIPS spread overshoot?," Monetary Trends, Federal Reserve Bank of St. Louis, issue Dec. [Downloadable!]
  6. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January. [Downloadable!] (restricted)
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