IDEAS home Printed from https://ideas.repec.org/p/zbw/glodps/377.html
   My bibliography  Save this paper

Interest Rate Hysteresis in Macroeconomic Investment under Uncertainty

Author

Listed:
  • Belke, Ansgar
  • Göcke, Matthias

Abstract

The interest rate is generally considered as an important driver of macroeconomic investment. As an innovation, this paper derives the exact shape of the “hysteretic” impact of changes in the interest rate on macroeconomic investment under the scenarios of both certainty and uncertainty. We capture the direct interest rate-hysteresis on the investments and the capital stock and, explicitly, of stochastic changes on the interest rate-investment hysteresis. Starting with hysteresis effects on a microeconomic level of a single firm, we apply an explicit aggregation procedure to derive the interest rate hysteresis effects on a macroeconomic level. Based on our simple model we are able to obtain some conclusions about the efficacy of a central bank’s interest rate policy, e.g. in times of low or even zero interest rates and high uncertainty, in terms of stimulating macroeconomic investment.

Suggested Citation

  • Belke, Ansgar & Göcke, Matthias, 2019. "Interest Rate Hysteresis in Macroeconomic Investment under Uncertainty," GLO Discussion Paper Series 377, Global Labor Organization (GLO).
  • Handle: RePEc:zbw:glodps:377
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/201555/1/GLO-DP-0377.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Matthias Göcke, 2002. "Various Concepts of Hysteresis Applied in Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 16(2), pages 167-188, April.
    2. Paulo R. Mota & José Varejão & Paulo B. Vasconcelos, 2012. "Hysteresis In The Dynamics Of Employment," Metroeconomica, Wiley Blackwell, vol. 63(4), pages 661-692, November.
    3. Richard Baldwin, 1989. "Sunk-Cost Hysteresis," NBER Working Papers 2911, National Bureau of Economic Research, Inc.
    4. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta†Eksten & Stephen J. Terry, 2018. "Really Uncertain Business Cycles," Econometrica, Econometric Society, vol. 86(3), pages 1031-1065, May.
    5. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    6. Ben S. Bernanke & Vincent R. Reinhart, 2004. "Conducting Monetary Policy at Very Low Short-Term Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 85-90, May.
    7. Caggiano, Giovanni & Castelnuovo, Efrem & Pellegrino, Giovanni, 2017. "Estimating the real effects of uncertainty shocks at the Zero Lower Bound," European Economic Review, Elsevier, vol. 100(C), pages 257-272.
    8. Paulo Mota & Paulo Vasconcelos, 2012. "Nonconvex adjustment costs, hysteresis, and the macrodynamics of employment," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 35(1), pages 93-112.
    9. Lawrence H. Summers, 2015. "Demand Side Secular Stagnation," American Economic Review, American Economic Association, vol. 105(5), pages 60-65, May.
    10. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
    11. Belke Ansgar, 2018. "Secular Stagnation, Unemployment Hysteresis and Monetary Policy in EMU: Scratches but Not Scars?," The Economists' Voice, De Gruyter, vol. 15(1), pages 1-14, December.
    12. Belke, Ansgar & Kotz, Hans-Helmut & Paul, Stephan & Schmidt, Christoph M. (ed.), 2009. "Wirtschaftspolitik im Zeichen europäischer Integration: Festschrift für Wim Kösters anlässlich seines 65. Geburtstages," RWI Schriften, RWI - Leibniz-Institut für Wirtschaftsforschung, volume 83, number 83.
    13. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-638, June.
    14. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-1148, September.
    15. Kedan, Danielle & Stuart, Rebecca, 2014. "Central Bank Communications: A Comparative Study," Quarterly Bulletin Articles, Central Bank of Ireland, pages 89-104, April.
    16. Piscitelli, Laura & Cross, Rod & Grinfeld, Michael & Lamba, Harbir, 2000. "A Test for Strong Hysteresis," Computational Economics, Springer;Society for Computational Economics, vol. 15(1-2), pages 59-78, April.
    17. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    18. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    19. Cross, Rod, 1993. "On the Foundations of Hysteresis in Economic Systems," Economics and Philosophy, Cambridge University Press, vol. 9(1), pages 53-74, April.
    20. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    21. Belke, Ansgar & Göcke, Matthias & Werner, Laura, 2014. "Hysteresis Effects in Economics – Different Methods for Describing Economic Path-dependence," Ruhr Economic Papers 468, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    22. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    23. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    24. Lawrence H Summers, 2014. "U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 49(2), pages 65-73, April.
    25. Ansgar Belke & Matthias Göcke, 2005. "Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation?," German Economic Review, Verein für Socialpolitik, vol. 6(2), pages 185-203, May.
    26. Baldwin, Richard, 1990. "Hysteresis in Trade," Empirical Economics, Springer, vol. 15(2), pages 127-142.
    27. Belke, Ansgar & Gocke, Matthias, 1999. "A Simple Model of Hysteresis in Employment under Exchange Rate Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 46(3), pages 260-286, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Belke, Ansgar & Frenzel Baudisch, Coletta & Göcke, Matthias, 2020. "Interest rate bands of inaction and play-hysteresis in domestic investment – Evidence for the Euro Area," Journal of Economic Behavior & Organization, Elsevier, vol. 175(C), pages 19-39.
    2. Belke, Ansgar & Klose, Jens, 2020. "Equilibrium real interest rates and the financial cycle: Empirical evidence for Euro area member countries," Economic Modelling, Elsevier, vol. 84(C), pages 357-366.
    3. Dosi Cesare & Moretto Michele & Tamborini Roberto, 2022. "Do balanced-budget fiscal stimuli of investment increase its economic value?," German Economic Review, De Gruyter, vol. 23(2), pages 157-179, May.
    4. Luigi Bonatti & Andrea Fracasso & Roberto Tamborini, 2020. "COVID-19 and the Future of Quantitative Easing in the Euro Area: Three Scenarios with a Trilemma," DEM Working Papers 2020/11, Department of Economics and Management.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Matthias Goecke, 2019. "Economic Hysteresis with Multiple Inputs - A Simplified Treatment," Interdisciplinary Description of Complex Systems - scientific journal, Croatian Interdisciplinary Society Provider Homepage: http://indecs.eu, vol. 17(1-B), pages 98-113.
    2. Ansgar Belke & Matthias Göcke & Laura Werner, 2014. "Hysteresis Effects in Economics – Different Methods for Describing Economic Path-dependence," Ruhr Economic Papers 0468, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    3. Belke, Ansgar & Göcke, Matthias & Werner, Laura, 2014. "Hysteresis Effects in Economics – Different Methods for Describing Economic Path-dependence," Ruhr Economic Papers 468, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. repec:zbw:rwirep:0468 is not listed on IDEAS
    5. Jolita Adamonis & Matthias Göcke, 2019. "Modelling economic hysteresis losses caused by sunk adjustment costs," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(2), pages 299-318, April.
    6. Belke, Ansgar & Frenzel Baudisch, Coletta & Göcke, Matthias, 2020. "Interest rate bands of inaction and play-hysteresis in domestic investment – Evidence for the Euro Area," Journal of Economic Behavior & Organization, Elsevier, vol. 175(C), pages 19-39.
    7. Matthias Göcke & Laura Werner, 2015. "Play Hysteresis in Supply or in Demand as Part of a Market Model," Metroeconomica, Wiley Blackwell, vol. 66(2), pages 339-374, May.
    8. Göcke, Matthias, 2012. "Play-hysteresis in supply as part of a market model," Discussion Papers 61, Justus Liebig University Giessen, Center for international Development and Environmental Research (ZEU).
    9. Ansgar Belke & Dominik Kronen, 2016. "Exchange rate bands of inaction and play-hysteresis in Greek exports to the Euro Area, the US and Turkey: sectoral evidence," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 349-390, May.
    10. Paulo Mota & José Varejão & Paulo Vasconcelos, 2015. "A hysteresis model-based indicator for employment adjustment rigidity," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(3), pages 547-569, August.
    11. Belke Ansgar & Göcke Matthias, 2005. "Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation?," German Economic Review, De Gruyter, vol. 6(2), pages 185-203, May.
    12. Ansgar Belke & Dominik Kronen, 2019. "Exchange rate bands of inaction and hysteresis in EU exports to the global economy: The role of uncertainty," Journal of Economic Studies, Emerald Group Publishing, vol. 46(2), pages 335-355, March.
    13. Tsekrekos, Andrianos E., 2010. "The effect of mean reversion on entry and exit decisions under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 725-742, April.
    14. Paulo R. Mota & Abel L. C. Fernandes & Paulo B. Vasconcelos, 2018. "Employment Hysteresis: An Argument For Avoiding Front-Loaded Fiscal Consolidations In The Eurozone," FEP Working Papers 610, Universidade do Porto, Faculdade de Economia do Porto.
    15. Laura M. Werner, 2020. "Hysteresis losses in the Preisach framework," Empirical Economics, Springer, vol. 58(3), pages 1249-1278, March.
    16. Rena Sivitanidou, 1999. "Does the Theory of Irreversible Investments Help Explain Movements in Office-Commerical Construction?," Working Paper 8659, USC Lusk Center for Real Estate.
    17. Gabriel P. Mathy, 2020. "How much did uncertainty shocks matter in the Great Depression?," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 14(2), pages 283-323, May.
    18. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 753-777.
    19. Ansgar Belke & Thomas Osowski, 2019. "International Effects Of Euro Area Versus U.S. Policy Uncertainty: A Favar Approach," Economic Inquiry, Western Economic Association International, vol. 57(1), pages 453-481, January.
    20. Caren Sureth, 2002. "Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach," German Economic Review, Verein für Socialpolitik, vol. 3(2), pages 185-221, May.
    21. Alvarez, Luis H.R., 2011. "Optimal capital accumulation under price uncertainty and costly reversibility," Journal of Economic Dynamics and Control, Elsevier, vol. 35(10), pages 1769-1788, October.

    More about this item

    Keywords

    Forward guidance; interest rate; investment; Mayergoyz-Preisach model; monetary policy; path dependence; non-ideal relay; sunk-cost hysteresis; uncertainty; zero lower bound;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:glodps:377. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/glabode.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/glabode.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.