Business investment, cost of capital and uncertainty in the United Kingdom — evidence from firm-level analysis

Marko Melolinna (), Srdan Tatomir () and Helen Miller ()
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Marko Melolinna: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Srdan Tatomir: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Helen Miller: Institute for Fiscal Studies, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 717, Bank of England working papers from Bank of England

Abstract: We use new firm-level estimates of the cost of capital and uncertainty to study the drivers of UK business investment in a neoclassical investment model. We construct firm-specific measures of the cost of capital and uncertainty and use new UK survey data to estimate firm-specific investment hurdle rates. There is substantial variation in the cost of capital and uncertainty faced by firms and we find both matter for investment. Firm heterogeneity might help explain the difference in firms’ investment paths shortly after the Great Recession. This suggests that, while common shocks, that is, aggregate uncertainty matters, it is also important to capture firm-specific uncertainty to better explain investment dynamics. Overall, between 2000 and 2015 investment responded relatively sluggishly to the cost of capital and more sharply to uncertainty, especially after the financial crisis. There are implications for monetary and macroeconomic policy. The relative importance of measures that alleviate uncertainty compared to changes in monetary policy rates could be larger than generally recognised.

Keywords: Investment; micro data; panel regression; hurdle rates; cost of capital; uncertainty (search for similar items in EconPapers)
JEL-codes: C23 D22 E22 E44 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2018-03-02
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-eec and nep-mac
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0717

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