Interest rate hysteresis in macroeconomic investment under uncertainty

Abstract

The interest rate is generally considered as a monetary policy tool and, at the same time, via Tobin's q, 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 certainty and uncertainty. We capture the direct interest rate-hysteresis effects on investment and the capital stock and, explicitly, stochastic changes of the interest rate-investment hysteresis relationship. 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 quite skeptical regarding the efficacy of the central bank in providing incentives for macroeconomic investment in times of low or even zero interest rates and high uncertainty. Only if the central bank implements monetary policy strategies such as "forward guidance" and is able to credibly commit to low interest rates also for the foreseeable future, our quite strong verdict may be of less relevance.