A new GLO Discussion Paper derives the exact shape of the “hysteretic” impact of changes in the interest rate on macroeconomic investment under scenarios of both certainty and uncertainty. Conclusions deal with the efficacy of central bank’s interest rate policy.

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GLO Discussion Paper No. 377, 2019

Interest Rate Hysteresis in Macroeconomic Investment under Uncertainty – Download PDF
by Belke, Ansgar & Göcke, Matthias

GLO Fellow Ansgar Belke

Author Abstract: The interest rate is generally considered as an important driver of macroeconomic investment. As an innovation, this paper derives the exact shape of the “hysteretic” impact of changes in the interest rate on macroeconomic investment under the scenarios of both certainty and uncertainty. We capture the direct interest rate-hysteresis on the investments and the capital stock and, explicitly, of stochastic changes on the interest rate-investment hysteresis. Starting with hysteresis effects on a microeconomic level of a single firm, we apply an explicit aggregation procedure to derive the interest rate hysteresis effects on a macroeconomic level. Based on our simple model we are able to obtain some conclusions about the efficacy of a central bank’s interest rate policy, e.g. in times of low or even zero interest rates and high uncertainty, in terms of stimulating macroeconomic investment.

GLO Discussion Papers are research and policy papers of the GLO Network which are widely circulated to encourage discussion. Provided in cooperation with EconStor, a service of the ZBW – Leibniz Information Centre for Economics, GLO Discussion Papers are among others listed in RePEc (see IDEAS,  EconPapers). Complete list of all GLO DPs – downloadable for free.

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