Interest Rate Spreads, Credit Constraints, and Investment Fluctuations: An Empirical Investigation

Mark Gertler (), Robert Glenn Hubbard () and Anil Kashyap ()

No 3495, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a simple framework that incorporates a role for "interest rate spreads" in models of investment fluctuations. Formally, we develop a simple model of investment and financial contracting under asymmetric information that can he used to generate an Euler equation describing firms' intertemporal decisions about investment. The Euler equation is than estimated using data on U.S. producers' durable equipment investment. We find that during certain periods -- owing to agency-cost problems -- the basic Euler equation is violated, and shifts in interest rate differentials help predict investment. Thus, the empirical results lend support to models emphasizing how: (i) movements in agency costs of external finance can amplify investment fluctuation, and (ii) changes in the interest rate spread may signal movements in these agency costs.

Date: Written 1990-11
Note: EFG ME
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Published as Financial Markets and Financial Crises, ed. R. Glenn Hubbard, University of Chicago Press, 1991.

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Related works:
Working Paper: INTEREST RATE SPREADS, CREDIT CONSTRAINTS, AND INVESTMENT FLUCTUATIONS: AN EMPIRICAL INVESTIGATION (1990)
Working Paper: Interest rate spreads, credit constraints and investment fluctuations: an empirical investigation (1990)
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