Abstract
We study a model in which a low monetary policy rate lowers the cost of corporate debt, potentially spurring productive investment; low interest rates, however, also induce firms to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit shareholders, leverage comes at the social cost of distorting their incentives, thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, because of the presence of a shadow banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first best. The optimal monetary policy may even consist of leaning against the wind, that is, not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency.