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Interest Rates and Macroeconomic Investment under Uncertainty

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  4. Vol. 54, Issue 3
  5. pp. 319–345

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Belke, A., Göcke, M. Interest Rates and Macroeconomic Investment under Uncertainty. Credit and Capital Markets – Kredit und Kapital, 54(3), 319-345. https://doi.org/10.3790/ccm.54.3.319
Belke, Ansgar and Göcke, Matthias "Interest Rates and Macroeconomic Investment under Uncertainty" Credit and Capital Markets – Kredit und Kapital 54.3, 2021, 319-345. https://doi.org/10.3790/ccm.54.3.319
Belke, Ansgar/Göcke, Matthias (2021): Interest Rates and Macroeconomic Investment under Uncertainty, in: Credit and Capital Markets – Kredit und Kapital, vol. 54, iss. 3, 319-345, [online] https://doi.org/10.3790/ccm.54.3.319
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Interest Rates and Macroeconomic Investment under Uncertainty

Belke, Ansgar | Göcke, Matthias

Credit and Capital Markets – Kredit und Kapital, Vol. 54 (2021), Iss. 3 : pp. 319–345

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.54.3.319
Language
English
Pages
27
Keywords

Author Details

Prof. Dr. Ansgar Belke (†), University of Duisburg-Essen.

Prof. Dr. Matthias Göcke, Justus Liebig University Giessen, VWL IV, Licher Str. 62, D-35394 Gießen.

References

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  2. Amable, B./Henry, J./Lordon, F./Topol, R. (1994): Strong Hysteresis versus Zero-Root Dynamics, Economic Letters, Vol. 44, 43–47.  Google Scholar
  3. Baldwin, R. E. (1989): Sunk-Cost Hysteresis. NBER Working Paper, 2911, National Bureau of Economic Research, Cambridge/MA.  Google Scholar
  4. Baldwin, R. E./Krugman, P. (1989): Persistent Trade Effects of Large Exchange Rate Shocks, Quarterly Journal of Economics, Vol. 104(4), 635–654.  Google Scholar
  5. Baldwin, R. E./Lyons, R. K. (1994): Exchange Rate Hysteresis: The Real Effects of Large vs. Small Policy Misalignments, European Economic Review 38:1, 1–22.  Google Scholar
  6. Bassi, F./Lang, D. (2016): Investment Hysteresis and Potential Output: A Post-Keynesian-Kaleckian Agent-based Approach, Economic Modelling, Vol. 52, 35–49.  Google Scholar
  7. Belke, A. (2018): Secular Stagnation, Unemployment Hysteresis and Monetary Policy in EMU: Scratches but Not Scars?, Economist’s Voice, 4 December, https://doi.org/10.1515/ev-2018-0034.  Google Scholar
  8. Belke, A. (2018a): Central Bank Communication and Transparency: The ECB and the European Parliament, International Journal of Monetary Economics and Finance, Vol. 11(5), 416–435.  Google Scholar
  9. Belke, A./Frenzel Baudisch, C./Göcke, M. (2020): Interest Rate Bands of Inaction and Play-Hysteresis in Domestic Investment –Evidence for the Euro Area, Journal of Economic Behavior and Organization, Vol. 175, 19–39.  Google Scholar
  10. Belke, A./Göcke, M. (1999): A Simple Model of Hysteresis in Employment Under Exchange Rate Uncertainty, Scottish Journal of Political Economy, Vol. 46(3), 260–286.  Google Scholar
  11. Belke, A./Göcke, M. (2005): Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation? German Economic Review, Vol. 6(2), 185–203.  Google Scholar
  12. Belke A./Göcke, M. (2009): Monetary Policy and Investment Decision – A Stylized Treatment of the Uncertainty Trap, in: Wirtschaftspolitik im Zeichen europäischer Integration – Festschrift für Wim Kösters, RWI-Schriften, Heft 83, Berlin, 223–246.  Google Scholar
  13. Belke, A./Göcke, M./Werner L. (2014): Hysteresis Effects in Economics – Different Methods for Describing Economic Path-dependence, in: Dias, J. C. (ed.), Hysteresis – Types, Applications, and Behavior Patterns in Complex Systems, Nova, New York, 19–42.  Google Scholar
  14. Bentolila, S./Bertola, G. (1990): Firing Costs and Labour Demand: How Bad Is Eurosclerosis? Review of Economic Studies, Vol. 57(3), 381–402.  Google Scholar
  15. Bernanke, B. S./Reinhart, V. R. (2004): Conducting Monetary Policy at Very Low Short-term Interest Rates, American Economic Review, Vol. 94(2), 85–90.  Google Scholar
  16. Blanchard, O. J./Summers, L. H. (1986): Hysteresis and the European Unemployment Problem, in: Fischer, S. (ed.), NBER Macroeconomics Annual 1, Cambridge: MIT Press, 15–78.  Google Scholar
  17. Bloom, N./Floetotto, M./Jaimovich, N./Saporta-Eksten, I./Terry, J. S. (2018): Really Uncertain Business Cycles, Econometrica, Vol. 86(3), 1031–1065.  Google Scholar
  18. Brokate, M./Sprekels, J. (1996): Hysteresis and Phase Transitions, Applied Mathematical Sciences 121, Springer, New York.  Google Scholar
  19. Buiter, W. H./Rahbari, E./Seydl, J. (2015): Secular Stagnation: The Time for One-armed Policy Is Over, VoxEU, 5 June.  Google Scholar
  20. Caggiano, G./Castelnuovo, E./Pellegrino, G. (2017): Estimating the Real Effects of Uncertainty Shocks at the Zero Lower Bound, European Economic Review, Vol. 100(C), 257–272.  Google Scholar
  21. Chang, T. (2011): Hysteresis in Unemployment for 17 OECD Countries: Stationary Test with a Fourier Function, Economic Modelling, Vol. 28(5), 2208–2214.  Google Scholar
  22. Cross, R. (1993): On the Foundations of Hysteresis in Economic Systems, Economics and Philosophy, Vol. 9(1), 53–74.  Google Scholar
  23. Dias, J. C./Shackleton, M. B. (2011): Hysteresis Effects under CIR Interest Rates, European Journal of Operational Research, Vol. 211(3), 594–600.  Google Scholar
  24. Dixit, A. (1989): Entry and Exit Decisions under Uncertainty, Journal of Political Economy, Vol. 97(3), 620–638.  Google Scholar
  25. Dixit, A./Pindyck, R. S. (1994): Investment under Uncertainty, Princeton, NY.  Google Scholar
  26. Dosi, C./Moretto, M./Tamborini, R. (2019): Balanced-Budget Fiscal Stimuli of Investment and Welfare Value, EconPol Working Paper 28, June 2019.  Google Scholar
  27. Eggertsson, G. B./Woodford, M. (2003): The Zero Bound on Interest Rates and Optimal Monetary Policy, Brookings Papers on Economic Activity, Vol. 1, 139–233.  Google Scholar
  28. García-Cintado, A./Romero-Ávila, D./Usabiaga, C. (2015): Can the Hysteresis Hypothesis in Spanish Regional Unemployment Be Beaten? New Evidence from Unit Root Tests with Breaks, Economic Modelling, Vol. 47, 244–252.  Google Scholar
  29. Göcke, M. (1994): Micro- and Macro-Hysteresis in Foreign Trade, Aussenwirtschaft – Schweizerische Zeitschrift für internationale Wirtschaftsbeziehungen, Vol. 49, 555–578.  Google Scholar
  30. Göcke, M. (2001): A Macroeconomic Model with Hysteresis in Foreign Trade, Metroeconomica – International Review of Economics, Vol. 52(4), 449–473.  Google Scholar
  31. Göcke, M. (2002): Various Concepts of Hysteresis Applied in Economics, Journal of Economic Surveys, Vol. 16(2), 167–88.  Google Scholar
  32. Göcke, M. (2019): Economic Hysteresis with Multiple Inputs – a Simplified Treatment, INDECS – Interdisciplinary Description of Complex Systems, Vol. 17(1-B), 98–113.  Google Scholar
  33. Hayashi, F. (1982): Tobin’s Marginal q and Average q: A Neoclassical Interpretation, Econometrica, Vol. 50(1), 213–224.  Google Scholar
  34. Hugonnier, J./Morellec, E. (2005): Real Options and Risk Aversion, Studies in Probability, Optimization and Statistics, Vol. 5: Real Options, Ambiguity, Risk and Insurance, IOS Press Ebooks, 52–65.  Google Scholar
  35. Kedan, D./Stuart, R. (2014): Central Bank Communications: A Comparative Study, Quarterly Bulletin 02/14, Central Bank of Ireland, April, 89–104.  Google Scholar
  36. Krasnosel’skii, M. A./Pokrovskii, A. V. (1989): Systems with Hysteresis, Springer, Berlin.  Google Scholar
  37. Majd, S./Pindyck, R. S. (1987): Time to Build, Option Value, and Investment Decisions, Journal of Financial Economics, Vol. 18(1), 7–27.  Google Scholar
  38. Mayergoyz, I. D. (1986): Mathematical Models of Hysteresis, IEEE Transactions on Magnetics, Vol. 22, 603–608.  Google Scholar
  39. McDonald, R. L./Siegel, D. R. (1986): The Value of Waiting to Invest, Quarterly Journal of Economics, Vol. 101(4), 707–727.  Google Scholar
  40. Mota, P. R./Vasconcelos, P. B. (2012): Nonconvex Adjustment Costs, Hysteresis, and the Macrodynamics of Employment, Journal of Post-Keynesian Economics, Vol. 35(1), 93–112.  Google Scholar
  41. Nishi, H./Stockhammer, E. (2019): Distribution Shocks in a Kaleckian Model with Hysteresis and Monetary Policy, Economic Modelling, available online: https://doi.org/10.1016/j.econmod.2019.11.030.  Google Scholar
  42. Pindyck, R. S. (1988): Irreversible Investment, Capacity Choice and Uncertainty, American Economic Review, Vol. 78(5), 969–985.  Google Scholar
  43. Pindyck, R. S. (1991): Irreversibility, Uncertainty, and Investment, Journal of Economic Literature, Vol. 29, 1110–1148.  Google Scholar
  44. Piscitelli, L./Cross, R./Grinfeld, M./Lambda, H. (2000): A Test for Strong Hysteresis, Computational Economics, Vol. 15(1–2), 59–78.  Google Scholar
  45. Preisach, F. (1935): Über die magnetische Nachwirkung, Zeitschrift für Physik, Vol. 94(5–6), 277–302.  Google Scholar
  46. Summers, L. (2014): U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound, Business Economics, Vol. 49(2), 65–73.  Google Scholar
  47. Summers, L. (2015): Demand Side Secular Stagnation, American Economic Review, Vol. 105(5), 60–65.  Google Scholar
  48. Amable, B./Henry, J./Lordon, F./Topol, R. (1991): Strong Hysteresis versus Zero-root Dynamics, Economics Letters, Vol. 44(1–2), 43–47.  Google Scholar
  49. Amable, B./Henry, J./Lordon, F./Topol, R. (1994): Strong Hysteresis versus Zero-Root Dynamics, Economic Letters, Vol. 44, 43–47.  Google Scholar
  50. Baldwin, R. E. (1989): Sunk-Cost Hysteresis. NBER Working Paper, 2911, National Bureau of Economic Research, Cambridge/MA.  Google Scholar
  51. Baldwin, R. E./Krugman, P. (1989): Persistent Trade Effects of Large Exchange Rate Shocks, Quarterly Journal of Economics, Vol. 104(4), 635–654.  Google Scholar
  52. Baldwin, R. E./Lyons, R. K. (1994): Exchange Rate Hysteresis: The Real Effects of Large vs. Small Policy Misalignments, European Economic Review 38:1, 1–22.  Google Scholar
  53. Bassi, F./Lang, D. (2016): Investment Hysteresis and Potential Output: A Post-Keynesian-Kaleckian Agent-based Approach, Economic Modelling, Vol. 52, 35–49.  Google Scholar
  54. Belke, A. (2018): Secular Stagnation, Unemployment Hysteresis and Monetary Policy in EMU: Scratches but Not Scars?, Economist’s Voice, 4 December, https://doi.org/10.1515/ev-2018-0034.  Google Scholar
  55. Belke, A. (2018a): Central Bank Communication and Transparency: The ECB and the European Parliament, International Journal of Monetary Economics and Finance, Vol. 11(5), 416–435.  Google Scholar
  56. Belke, A./Frenzel Baudisch, C./Göcke, M. (2020): Interest Rate Bands of Inaction and Play-Hysteresis in Domestic Investment –Evidence for the Euro Area, Journal of Economic Behavior and Organization, Vol. 175, 19–39.  Google Scholar
  57. Belke, A./Göcke, M. (1999): A Simple Model of Hysteresis in Employment Under Exchange Rate Uncertainty, Scottish Journal of Political Economy, Vol. 46(3), 260–286.  Google Scholar
  58. Belke, A./Göcke, M. (2005): Real Options Effects on Employment: Does Exchange Rate Uncertainty Matter for Aggregation? German Economic Review, Vol. 6(2), 185–203.  Google Scholar
  59. Belke A./Göcke, M. (2009): Monetary Policy and Investment Decision – A Stylized Treatment of the Uncertainty Trap, in: Wirtschaftspolitik im Zeichen europäischer Integration – Festschrift für Wim Kösters, RWI-Schriften, Heft 83, Berlin, 223–246.  Google Scholar
  60. Belke, A./Göcke, M./Werner L. (2014): Hysteresis Effects in Economics – Different Methods for Describing Economic Path-dependence, in: Dias, J. C. (ed.), Hysteresis – Types, Applications, and Behavior Patterns in Complex Systems, Nova, New York, 19–42.  Google Scholar
  61. Bentolila, S./Bertola, G. (1990): Firing Costs and Labour Demand: How Bad Is Eurosclerosis? Review of Economic Studies, Vol. 57(3), 381–402.  Google Scholar
  62. Bernanke, B. S./Reinhart, V. R. (2004): Conducting Monetary Policy at Very Low Short-term Interest Rates, American Economic Review, Vol. 94(2), 85–90.  Google Scholar
  63. Blanchard, O. J./Summers, L. H. (1986): Hysteresis and the European Unemployment Problem, in: Fischer, S. (ed.), NBER Macroeconomics Annual 1, Cambridge: MIT Press, 15–78.  Google Scholar
  64. Bloom, N./Floetotto, M./Jaimovich, N./Saporta-Eksten, I./Terry, J. S. (2018): Really Uncertain Business Cycles, Econometrica, Vol. 86(3), 1031–1065.  Google Scholar
  65. Brokate, M./Sprekels, J. (1996): Hysteresis and Phase Transitions, Applied Mathematical Sciences 121, Springer, New York.  Google Scholar
  66. Buiter, W. H./Rahbari, E./Seydl, J. (2015): Secular Stagnation: The Time for One-armed Policy Is Over, VoxEU, 5 June.  Google Scholar
  67. Caggiano, G./Castelnuovo, E./Pellegrino, G. (2017): Estimating the Real Effects of Uncertainty Shocks at the Zero Lower Bound, European Economic Review, Vol. 100(C), 257–272.  Google Scholar
  68. Chang, T. (2011): Hysteresis in Unemployment for 17 OECD Countries: Stationary Test with a Fourier Function, Economic Modelling, Vol. 28(5), 2208–2214.  Google Scholar
  69. Cross, R. (1993): On the Foundations of Hysteresis in Economic Systems, Economics and Philosophy, Vol. 9(1), 53–74.  Google Scholar
  70. Dias, J. C./Shackleton, M. B. (2011): Hysteresis Effects under CIR Interest Rates, European Journal of Operational Research, Vol. 211(3), 594–600.  Google Scholar
  71. Dixit, A. (1989): Entry and Exit Decisions under Uncertainty, Journal of Political Economy, Vol. 97(3), 620–638.  Google Scholar
  72. Dixit, A./Pindyck, R. S. (1994): Investment under Uncertainty, Princeton, NY.  Google Scholar
  73. Dosi, C./Moretto, M./Tamborini, R. (2019): Balanced-Budget Fiscal Stimuli of Investment and Welfare Value, EconPol Working Paper 28, June 2019.  Google Scholar
  74. Eggertsson, G. B./Woodford, M. (2003): The Zero Bound on Interest Rates and Optimal Monetary Policy, Brookings Papers on Economic Activity, Vol. 1, 139–233.  Google Scholar
  75. García-Cintado, A./Romero-Ávila, D./Usabiaga, C. (2015): Can the Hysteresis Hypothesis in Spanish Regional Unemployment Be Beaten? New Evidence from Unit Root Tests with Breaks, Economic Modelling, Vol. 47, 244–252.  Google Scholar
  76. Göcke, M. (1994): Micro- and Macro-Hysteresis in Foreign Trade, Aussenwirtschaft – Schweizerische Zeitschrift für internationale Wirtschaftsbeziehungen, Vol. 49, 555–578.  Google Scholar
  77. Göcke, M. (2001): A Macroeconomic Model with Hysteresis in Foreign Trade, Metroeconomica – International Review of Economics, Vol. 52(4), 449–473.  Google Scholar
  78. Göcke, M. (2002): Various Concepts of Hysteresis Applied in Economics, Journal of Economic Surveys, Vol. 16(2), 167–88.  Google Scholar
  79. Göcke, M. (2019): Economic Hysteresis with Multiple Inputs – a Simplified Treatment, INDECS – Interdisciplinary Description of Complex Systems, Vol. 17(1-B), 98–113.  Google Scholar
  80. Hayashi, F. (1982): Tobin’s Marginal q and Average q: A Neoclassical Interpretation, Econometrica, Vol. 50(1), 213–224.  Google Scholar
  81. Hugonnier, J./Morellec, E. (2005): Real Options and Risk Aversion, Studies in Probability, Optimization and Statistics, Vol. 5: Real Options, Ambiguity, Risk and Insurance, IOS Press Ebooks, 52–65.  Google Scholar
  82. Kedan, D./Stuart, R. (2014): Central Bank Communications: A Comparative Study, Quarterly Bulletin 02/14, Central Bank of Ireland, April, 89–104.  Google Scholar
  83. Krasnosel’skii, M. A./Pokrovskii, A. V. (1989): Systems with Hysteresis, Springer, Berlin.  Google Scholar
  84. Majd, S./Pindyck, R. S. (1987): Time to Build, Option Value, and Investment Decisions, Journal of Financial Economics, Vol. 18(1), 7–27.  Google Scholar
  85. Mayergoyz, I. D. (1986): Mathematical Models of Hysteresis, IEEE Transactions on Magnetics, Vol. 22, 603–608.  Google Scholar
  86. McDonald, R. L./Siegel, D. R. (1986): The Value of Waiting to Invest, Quarterly Journal of Economics, Vol. 101(4), 707–727.  Google Scholar
  87. Mota, P. R./Vasconcelos, P. B. (2012): Nonconvex Adjustment Costs, Hysteresis, and the Macrodynamics of Employment, Journal of Post-Keynesian Economics, Vol. 35(1), 93–112.  Google Scholar
  88. Nishi, H./Stockhammer, E. (2019): Distribution Shocks in a Kaleckian Model with Hysteresis and Monetary Policy, Economic Modelling, available online: https://doi.org/10.1016/j.econmod.2019.11.030.  Google Scholar
  89. Pindyck, R. S. (1988): Irreversible Investment, Capacity Choice and Uncertainty, American Economic Review, Vol. 78(5), 969–985.  Google Scholar
  90. Pindyck, R. S. (1991): Irreversibility, Uncertainty, and Investment, Journal of Economic Literature, Vol. 29, 1110–1148.  Google Scholar
  91. Piscitelli, L./Cross, R./Grinfeld, M./Lambda, H. (2000): A Test for Strong Hysteresis, Computational Economics, Vol. 15(1–2), 59–78.  Google Scholar
  92. Preisach, F. (1935): Über die magnetische Nachwirkung, Zeitschrift für Physik, Vol. 94(5–6), 277–302.  Google Scholar
  93. Summers, L. (2014): U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound, Business Economics, Vol. 49(2), 65–73.  Google Scholar
  94. Summers, L. (2015): Demand Side Secular Stagnation, American Economic Review, Vol. 105(5), 60–65.  Google Scholar

Abstract

The interest rate is generally considered as an important driver of macroeconomic investment characterised by a particular form of path dependency, “hysteresis”. At the same time, the interest rate channel is a central ingredient of monetary policy transmission. In this context, we shed light on the issue (which currently is a matter of concern for many central banks) whether uncertainty over future interest rates at the zero lower bound hampers monetary policy transmission. As an innovation we derive the exact shape of the “hysteretic” impact of rate changes on macroeconomic investment under different sorts of uncertainty. Starting with hysteresis effects on the micro level, we apply an adequate aggregation procedure to derive the interest rate effects on a macro level. Our results may serve as a guideline for future central banks’ policies on how to stimulate investment in times of low or even zero interest rates and uncertainty.

Table of Contents

Section Title Page Action Price
Ansgar Belke (†) / Matthias Göcke: Interest Rates and Macroeconomic Investment under Uncertainty 1
Abstract 1
I. Introduction 1
II. Sunk Cost Hysteresis and Non-ideal Relays 5
1. Sunk Cost Hysteresis and Interest Changes in a Scenario with no Uncertainty 5
2. Non-ideal Relay in a Scenario with Stochastic Revenue Changes 1
3. Non-ideal Relay in a Scenario with Stochastic Interest Rate Changes 1
4. Non-ideal Relay Related to Interest Rates in a Stochastic Scenario 1
5. Implications for Monetary Policy in an Uncertain Crisis Situation 1
III. Aggregation and Macroeconomic Investment Hysteresis 1
IV. Conclusions 2
References 2

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