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Monetary Easing, Investment and Financial Instability

Author

Listed:
  • Guillaume Plantin

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Viral Acharya

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

  • Guillaume Plantin & Viral Acharya, 2018. "Monetary Easing, Investment and Financial Instability," SciencePo Working papers Main hal-03393126, HAL.
    • Handle: RePEc:hal:spmain:hal-03393126
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03393126
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    References listed on IDEAS

    as
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    13. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," SciencePo Working papers Main hal-01168494, HAL.
    14. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," SciencePo Working papers hal-01168494, HAL.
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