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Monetary policy actions and the incentive to invest

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  • William R. Emmons
  • Frank A. Schmid

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.

Suggested Citation

  • William R. Emmons & Frank A. Schmid, 2004. "Monetary policy actions and the incentive to invest," Working Papers 2004-018, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2004-018
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    References listed on IDEAS

    as
    1. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
    2. Frank A. Schmid, 2003. "Does the TIPS spread overshoot?," Monetary Trends, Federal Reserve Bank of St. Louis, issue Dec.
    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.
    4. Brian P. 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.).
    5. 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.
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    1. Hammoudeh, Shawkat & Liu, Tengdong & Chang, Chia-Lin & McAleer, Michael, 2013. "Risk spillovers in oil-related CDS, stock and credit markets," Energy Economics, Elsevier, vol. 36(C), pages 526-535.
    2. Manfred Fruhwirth & Paul Schneider & Markus S. Schwaiger, 2007. "Timing Decisions in a Multinational Context: Implementing the Amin/Bodurtha Framework," Multinational Finance Journal, Multinational Finance Journal, vol. 11(3-4), pages 157-178, September.
    3. Thuy T. Dang & Anh D. Pham & Diem N. Tran, 2020. "Impact of Monetary Policy on Private Investment: Evidence from Vietnam’s Provincial Data," Economies, MDPI, vol. 8(3), pages 1-15, September.
    4. Lahiani, Amine & Hammoudeh, Shawkat & Gupta, Rangan, 2016. "Linkages between financial sector CDS spreads and macroeconomic influence in a nonlinear setting," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 443-456.
    5. Chen, Li-Hsueh & Hammoudeh, Shawkat & Yuan, Yuan, 2011. "Asymmetric convergence in US financial credit default swap sector index markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(4), pages 408-418.
    6. Fairchild, Richard, 2011. "An entrepreneur's choice of venture capitalist or angel-financing: A behavioral game-theoretic approach," Journal of Business Venturing, Elsevier, vol. 26(3), pages 359-374, May.

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    Monetary policy;

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