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Risk-averse corporate investment behavior and the effectiveness of quantitative easing

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  • Wu, Ying

Abstract

This paper analyzes how risk-averse investment behavior in a liquidity trap can render quantitative easing ineffective under certain circumstances. For risk-averse firms that could lever either a risky investment project or a riskless alternative, I show that the real interest rate responsiveness of a relative net investment return causes both the interest-rate sensitivity of investment and the slope of the aggregate demand (AD) curve to bifurcate. Except for the scenario of sufficiently low investment return and high real interest rates, investment is positively related to real interest rates and the AD curve is downward sloping; under the circumstances, quantitative easing backfires but laissez faire helps stimulate investment instead.

Suggested Citation

  • Wu, Ying, 2024. "Risk-averse corporate investment behavior and the effectiveness of quantitative easing," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 1270-1286.
    • Handle: RePEc:eee:reveco:v:92:y:2024:i:c:p:1270-1286
    DOI: 10.1016/j.iref.2024.02.042
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    More about this item

    Keywords

    Corporate investment; Risk aversion; Quantitative easing; Laissez faire; Aggregate demand;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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