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Monetary Easing, Investment and Financial Instability

Author

Listed:
  • Guillaume Plantin

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Viral Acharya

Abstract

This paper studies a model of the interest-rate channel of monetary policy in which a low policy rate lowers the cost of capital for firms thereby spurring investment, but also induces destabilizing "carry trades" against their assets. If the public sector does not have sufficient fiscal capacity to cope with the large resulting private borrowing, then carry trades and productive investment compete for scarce funds, and so the former crowd out the latter. Below an endogenous lower bound, monetary easing generates only limited investment at the cost of large and socially wasteful financial risk taking.

Suggested Citation

  • Guillaume Plantin & Viral Acharya, 2018. "Monetary Easing, Investment and Financial Instability," SciencePo Working papers Main hal-03393126, HAL.
    • Handle: RePEc:hal:spmain:hal-03393126
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03393126
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    File URL: https://hal-sciencespo.archives-ouvertes.fr/hal-03393126/document
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    References listed on IDEAS

    as
    1. John B. Taylor, 2012. "Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1017-1032, September.
    2. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 57-95.
    3. Acharya, Viral & Naqvi, Hassan, 2012. "The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle," Journal of Financial Economics, Elsevier, vol. 106(2), pages 349-366.
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    5. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," SciencePo Working papers Main hal-01168494, HAL.
    6. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    7. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    8. John B. Taylor, 2011. "Macroeconomic Lessons from the Great Deviation," NBER Chapters, in: NBER Macroeconomics Annual 2010, volume 25, pages 387-395, National Bureau of Economic Research, Inc.
    9. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 146-175.
    10. Joseph Abadi & Markus Brunnermeier & Yann Koby, 2023. "The Reversal Interest Rate," American Economic Review, American Economic Association, vol. 113(8), pages 2084-2120, August.
    11. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," SciencePo Working papers hal-01168494, HAL.
    12. Ben S. Bernanke, 2010. "Monetary policy and the housing bubble: a speech at the Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010," Speech 499, Board of Governors of the Federal Reserve System (U.S.).
    13. repec:hal:spmain:info:hdl:2441/hqvfahst79ekpe0losvq1h46k is not listed on IDEAS
    14. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
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