Adverse Effects of Ultra-Loose Monetary Policies on Investment, Growth and Income Distribution

35 Pages Posted: 28 Mar 2016  

Andreas Hoffmann

University of Leipzig - Institute for Economic Policy

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Date Written: February 15, 2016

Abstract

The paper analyses adverse investment, growth and distributional effects of ultra-loose monetary policies based on the monetary overinvestment theories of Hayek and Mises. We argue that ultra-loose monetary policies create incentives to substitute real investment by financial investment. When interest rates are expected to fall in the long term, the marginal and average efficiency of investments fall along, dampening GDP growth. We further show that the prolonged period of very low interest rates tends to distribute income towards higher income classes. This helps explain why consumer price inflation in most advanced economies does not pick up despite unprecedented monetary expansions.

Keywords: Hayek, Mises, monetary overinvestment theory, asymmetric monetary policy, financial crisis, marginal productivity of investment, secular stagnation

JEL Classification: E520, E580, F420, E630

Suggested Citation

Hoffmann, Andreas and Schnabl, Gunther, Adverse Effects of Ultra-Loose Monetary Policies on Investment, Growth and Income Distribution (February 15, 2016). CESifo Working Paper Series No. 5754. Available at SSRN: https://ssrn.com/abstract=2747865

Andreas Hoffmann

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Str. 12
Leipzig, 04109
Germany

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

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