Real interest rates and cash accumulation by European companies

When we look at the liquidity (cash) held by companies in the euro zone, we see a considerable increase in these cash reserves since 2001 . This increase in cash holdings by euro-zone companies has gone hand-in-hand with a fall in their net investment rate: a reasonable objective of euro-zone economic policy would consist in transform ing the cash held into additional investment. This could be achieved by keeping real interest rates very negative ( by keeping inflation well above nominal interest rates). However, there are two drawbacks to such a solution: Negative real interest rates may cause inflation to remain very high; Real interest rates remaining negative would cause an excessive and continuous rise in asset prices (real estate, financial). In order to avoid these drawbacks , a way should be found to: Limit the rise in inflation; this can be done through tax policy; Limit asset price increases; again, this may involve tax policy (e.g., increased taxation of capital gains).