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Sticky Discount Rates

Author

Listed:
  • Masao Fukui

    (Boston University (E-mail: mfukui@bu.edu))

  • Niels Joachim Gormsen

    (University of Chicago, Booth School of Business (E-mail: niels.gormsen@chicagobooth.edu))

  • Kilian Huber

    (University of Chicago, Booth School of Business (E-mail: kilianhuber@uchicago.edu))

Abstract

We show that firms' nominal required returns (i.e., discount rates) are sticky with respect to expected inflation. Sticky discount rates generate distinct theoretical predictions that are broadly consistent with stylized empirical patterns: increases in expected inflation directly raise real investment; demand shocks generate investment-consumption comovement; and the sensitivity of investment to interest rates is low. Sticky discount rates imply monetary non- neutrality, even when all other prices are flexible, because of a direct link from expected inflation to investment. In the New Keynesian optimal monetary policy problem, the central bank steers long-run inflation expectations, even in response to temporary shocks.

Suggested Citation

  • Masao Fukui & Niels Joachim Gormsen & Kilian Huber, 2025. "Sticky Discount Rates," IMES Discussion Paper Series 25-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:25-e-16
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    File URL: https://www.imes.boj.or.jp/research/papers/english/25-E-16.pdf
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    References listed on IDEAS

    as
    1. Adrien Auclert & Ludwig Straub & Matthew Rognlie, 2019. "Micro Jumps, Macro Humps: monetary policy and business cycles in an estimated HANK model," 2019 Meeting Papers 1449, Society for Economic Dynamics.
    2. John R. Graham, 2022. "Presidential Address: Corporate Finance and Reality," Journal of Finance, American Finance Association, vol. 77(4), pages 1975-2049, August.
    3. Auclert, Adrien & Rognlie, Matthew & Souchier, Martin & Straub, Ludwig, 2021. "Exchange Rates and Monetary Policy with Heterogeneous Agents: Sizing up the Real Income Channel," CEPR Discussion Papers 16198, C.E.P.R. Discussion Papers.
    4. Iván Werning, 2015. "Incomplete Markets and Aggregate Demand," NBER Working Papers 21448, National Bureau of Economic Research, Inc.
    5. Bilbiie, Florin O. & Känzig, Diego R. & Surico, Paolo, 2022. "Capital and income inequality: An aggregate-demand complementarity," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 154-169.
    6. Lawrence H. Summers, 1987. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 295-304, National Bureau of Economic Research, Inc.
    7. John Graham, 2022. "Presidential Address: Corporate Finance and Reality," NBER Working Papers 29841, National Bureau of Economic Research, Inc.
    8. Jagannathan, Ravi & Matsa, David A. & Meier, Iwan & Tarhan, Vefa, 2016. "Why do firms use high discount rates?," Journal of Financial Economics, Elsevier, vol. 120(3), pages 445-463.
    9. Benigno, Pierpaolo & Woodford, Michael, 2012. "Linear-quadratic approximation of optimal policy problems," Journal of Economic Theory, Elsevier, vol. 147(1), pages 1-42.
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    2. Ichiro Fukunaga & Yoshihiko Hogen & Yoichi Ueno, 2024. "Japan's Economy and Prices over the Past 25 Years: Past Discussions and Recent Issues," Bank of Japan Working Paper Series 24-E-14, Bank of Japan.

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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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