The Effects on Investment Behavior of Zero Interest Rate Policy—Evidence From a Roulette Experiment

Christian A. Conrad

Abstract


This paper examines the effects of interest rate cuts on investment behavior. The methodology is to simulate investment decision making under different capital costs. The experiment showed that decreasing interest rates encourage risk-taking. With the decreased interest rate as borrowing costs the risk taking increased weakly but continuously. The risk taking increased strongly when the interest rate reached zero. Thus the experiment showed excessive risk-taking when there were no capital costs. This finding supports the hypothesis that extreme expansive monetary policy with low, zero or negative interest rates encourage financial bubbles and overinvestments or wrong investments in the real economy.


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DOI: https://doi.org/10.11114/aef.v6i4.4272

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Applied Economics and Finance    ISSN 2332-7294 (Print)   ISSN 2332-7308 (Online)

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