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Monetary Easing, Leveraged Payouts and Lack of Investment

Author

Listed:
  • Viral V Acharya

    (NYU - New York University [New York] - NYU - NYU System)

  • Guillaume Plantin

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

Abstract

This paper studies a model in which a low monetary policy rate lowers the cost of capital for entrepreneurs, potentially spurring productive investment. Low interest rates, however, also induce entrepreneurs to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit entrepreneurs, they come at the social cost of reducing their incentives thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, due to the presence of a shadow-banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first-best. The optimal monetary policy may even consist of "leaning against the wind," i.e., not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency.

Suggested Citation

  • Viral V Acharya & Guillaume Plantin, 2019. "Monetary Easing, Leveraged Payouts and Lack of Investment," SciencePo Working papers Main hal-03792101, HAL.
  • Handle: RePEc:hal:spmain:hal-03792101
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03792101
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    References listed on IDEAS

    as
    1. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 57-95.
    2. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," SciencePo Working papers Main hal-01168494, HAL.
    3. HOLMSTROM, Bengt, 1979. "Moral hazard and observability," LIDAM Reprints CORE 379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    4. Emmanuel Farhi & Jean Tirole, 2012. "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts," American Economic Review, American Economic Association, vol. 102(1), pages 60-93, February.
    5. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 146-175.
    6. Joseph Abadi & Markus Brunnermeier & Yann Koby, 2023. "The Reversal Interest Rate," American Economic Review, American Economic Association, vol. 113(8), pages 2084-2120, August.
    7. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," SciencePo Working papers hal-01168494, HAL.
    8. Ricardo J Caballero & Alp Simsek, 2020. "A Risk-Centric Model of Demand Recessions and Speculation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(3), pages 1493-1566.
    9. repec:hal:spmain:info:hdl:2441/hqvfahst79ekpe0losvq1h46k is not listed on IDEAS
    10. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    Full references (including those not matched with items on IDEAS)

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