NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Guillaume Plantin

Sciences Po
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France
Tel: +33687625100

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Institutional Affiliations: Sciences Po and CEPR

NBER Working Papers and Publications

November 2019Monetary Easing, Leveraged Payouts and Lack of Investment
with Viral V. Acharya: w26471
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 ...
 
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