Do Interest Rates Affect Business Investment? Evidence from Australian Company-level Data

Jonathan Hambur and Gianni La Cava ()
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Jonathan Hambur: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: We examine the distribution of borrowing rates paid by companies, and the relationship between corporate borrowing rates and fixed capital investment, using a unique hand-collected dataset. We find a high degree of heterogeneity in companies' cost of debt. Also, since the global financial crisis, the spread between the rates paid by companies at the top and bottom of the distribution has widened. Borrowing rates for a large portion of companies, including smaller and riskier ones, have remained high in recent years, despite falls in aggregate indicators of interest rates. This heterogeneity in borrowing rates enables us to find a significant inverse relationship between the cost of debt and corporate investment, which is generally not evident in aggregate data. We argue that this relationship may be due to credit supply effects, as a relaxation of lending standards leads to lower credit spreads and encourages more investment. These findings shed new light on the link between monetary policy and business investment in Australia.

Keywords: interest rates; investment; user cost of capital (search for similar items in EconPapers)
JEL-codes: E22 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (8)

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