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Monetary Policy Actions and the Incentive to Invest
The ability of monetary policy actions to affect the private sector's incentive to invest in fixed capital is hotly debated. Whereas a downward shift in the yield curve increases the present value of expected cash flows and should spur investment, lower short term interest rates make delay more desirable. These influences work against each other so the net effect of stimulative monetary policy actions could go either way. This article outlines a simple investment decision rule that captures both effects of changing interest rates. It also clarifies why monetary policy actions that shift the yield curve may or may not affect fixed investment.