The fact that companies require a very high return on equity makes expansionary monetary policies ineffective unless corporate debt leverage increases sharply

The fall in risk-free bond yields driven by central banks in OECD countries has not pushed down the required return on companies’ equity. This means that unless companies increase their debt leverage, expansionary monetary policies will not lead to additional investment, since they do not push down the required return on this physical capital. For expansionary monetary policies to lead to additional investment, the required return on physical capital must fall , which is compatible with a stable return on equity at a high level only if companies increase their debt leverage. It would therefore have been much health ie r if companies lowered the required return on equity in response to the fall in risk-free bond interest rates .