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Sticky Discount Rates

Author

Listed:
  • Masao Fukui
  • Niels Joachim Gormsen
  • Kilian Huber

Abstract

We show that firms' nominal required returns to capital (i.e., their discount rates) are sticky with respect to expected inflation. Such nominally sticky discount rates imply that increases in expected inflation directly lower firms' real discount rates and thereby raise real investment. We analyze the macroeconomic implications of sticky discount rates using a New Keynesian model. The model naturally generates investment-consumption comovement in response to household demand shocks and higher investment in response to government spending. Sticky discount rates imply that inflation has real effects, even absent other nominal rigidities, making them a distinct source of monetary non-neutrality. At the same time, sticky discount rates make the short-term interest rate less effective at stimulating investment. Optimal monetary policy focuses on inflation expectations and permanently lowers the long-run inflation target in response to expansionary shocks, even when shocks are temporary.

Suggested Citation

  • Masao Fukui & Niels Joachim Gormsen & Kilian Huber, 2024. "Sticky Discount Rates," NBER Working Papers 32238, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32238
    Note: AP CF EFG IFM IO ME PR
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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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