Monetary Easing, Leveraged Payouts and Lack of Investment

35 Pages Posted: 21 Nov 2019

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Guillaume Plantin

Sciences Po

Multiple version iconThere are 2 versions of this paper

Date Written: November 10, 2019

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.

Keywords: Unconventional Monetary Policy, Monetary Easing, Shadow Banking, Leaning Against the Wind, Leverage, Share Buybacks

JEL Classification: E52, E58, G01, G21, G23, G28

Suggested Citation

Acharya, Viral V. and Plantin, Guillaume, Monetary Easing, Leveraged Payouts and Lack of Investment (November 10, 2019). Available at SSRN: https://ssrn.com/abstract=3484935 or http://dx.doi.org/10.2139/ssrn.3484935

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Guillaume Plantin

Sciences Po ( email )

28 Rue des S. Peres
Paris
France

HOME PAGE: http://www.gplantin.net/

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