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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
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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.
    3. Barry, John W. & Carlin, Bruce I. & Crane, Alan D. & Graham, John R., 2026. "Hurdle rate buffers and bargaining power in asset acquisition," Journal of Financial Economics, Elsevier, vol. 178(C).

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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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