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Monetary Easing, Investment and Financial Instability

Author

Listed:
  • Viral Acharya

    (Reserve Bank of India)

  • Guillaume Plantin

    (Département d'économie)

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

  • Viral Acharya & Guillaume Plantin, 2018. "Monetary Easing, Investment and Financial Instability," Sciences Po publications DP 13072, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/2oaa6391f290lqkugdaeab6cq4
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    References listed on IDEAS

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    Cited by:

    1. Kaufmann, Christoph, 2020. "Investment funds, monetary policy, and the global financial cycle," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224573, Verein für Socialpolitik / German Economic Association.
    2. Grosse-Rueschkamp, Benjamin & Steffen, Sascha & Streitz, Daniel, 2019. "A capital structure channel of monetary policy," Journal of Financial Economics, Elsevier, vol. 133(2), pages 357-378.

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    More about this item

    Keywords

    Monetary policy; Financial stability; Shadow banking; Carry trades;
    All these keywords.

    JEL classification:

    • 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
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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