The Impact of Inflation and a Real Interest Rate Gap on the Capital Market and Economic Development - Evidence from Two Behavioral Experiments

This paper investigates the impact of central bank interventions in the capital market on savers and corporate investments through two behavioral experiments. The interest lag hypothesis is confirmed. Inflation changes the distribution it favors debtors and disadvantages creditors, such as savers. When expansive monetary policy by central banks results in inflation, the artificial reduction of the real interest rate acts as an economic stimulus. In this context, the positive economic effects of a low interest rate or QE policy are largely due to a redistribution policy at the expense of savers, who subsidize the expansion of corporate capacity. However, our experiments show also the risk of overstimulation, potentially leading to boom and bust cycles. In addition, the expansive monetary policy was ineffective in the long run and unfair in terms of distribution policy.