"When interest rates are high and inflation is low, investing is a cinch: savers can earn easy returns by simply parking their funds in Treasury bills or similar safe assets. But it becomes much harder when interest rates are low, as they have been in most advanced economies since the global financial crisis of 2008–09 and in some of them for longer still. Fed up with zero or near-zero interest rates, savers may be tempted to experiment with riskier assets or strategies in the hope of higher returns. Economists call this the search for yield.
Individual investors may shift money out of savings accounts and into stock markets. Firms might seek to boost income through speculative investments financed by debt because borrowing is cheap. Financial institutions such as banks and insurance companies may make risky bets to maintain profits or even to survive. But riskier portfolios increase the likelihood of loss. Higher indebtedness means firms are in a more precarious position when confronted by adverse shocks. The result is greater institutional vulnerability and increased likelihood of economic and financial instability."
The article is published in the IMF's Finance & Development magazine and available via the following links in English and Russian languages.
Source: IMF, FINANCE & DEVELOPMENT, SUMMER 2021
ART: ISTOCK / RASTUDIO