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From what I understand in an economic downturn the wages are "sticky". This results in increased unemployment. To combat this the central bank according to monetarism lowers the interest rates and "prints money" (QE).

But how about the return on investment, is that not also "sticky"? As an example say that I see that I get 0% interest rate on my savings in the bank. I get upset. "Last year I got 3%" I may think. So I move my money into the stock market in the form of index funds. Saving in the bank is safe. I was guaranteed my money back + interest rates. Having my money in the stock market is less safe. The stock market may crash. So due to the "sticky" nature of return on investment I have increased my risk to maintain a certain percentwise return.

Say millions of people do the same. Since the index funds are market cap weighted they have to buy the most stocks of the companies with the largest market cap: Apple, Microsoft, Facebook etc. So the price of the most valuable stocks go up even further. As a result of this the pricing of these stocks in particular but also the stock market as a whole may increase to unsustainable levels and we could have a bubble?

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    $\begingroup$ 1. "from what I understand in an economic downturn the wages are "sticky"." - no wages are downward rigid or sticky in short-run no matter whether we are talking about downturn or upturn. 2. Please can you add more details and clarity? There are numerous different ways of investing money. So you need to be more precise - are you talking about return on investment in stocks? 3. Also can you please provide some reference/source for an assertion that merely moving money from deposit accounts to stock market itself increases volatility of financial system? $\endgroup$
    – 1muflon1 ♦
    May 2, 2021 at 14:49
  • $\begingroup$ I think I understand your point about wages being downward rigid but not upward rigid. People have a hard time accepting a pay cut, but will accept a raise in a blink of an eye. However in an economic upturn salaries should go up, so in that case downward rigidity does not really matter? $\endgroup$
    – Andy
    May 2, 2021 at 15:34
  • $\begingroup$ arguing something being of a less relevance to public policy and something not existing at all are two very different propositions $\endgroup$
    – 1muflon1 ♦
    May 2, 2021 at 19:26

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