The Impact of Interest: Firms' Investment Sensitivity to Interest Rates

Lea Best, Benjamin Born and Manuel Menkhoff

No 20695, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how firms’ investment responds to interest rate changes based on a German firm survey, combining hypothetical vignettes, open-ended questions, and rich firm data. We estimate a 7 percent semi-elasticity of investment to loan rates—about half the total corporate investment response to monetary policy shocks. Adjustment is heterogeneous: many firms do not react, citing cash buffers or a lack of opportunities, while adjusters revise sharply. Managers’ narratives about monetary policy transmission to investment emphasize direct borrowing-cost effects and rarely mention general-equilibrium channels. Local projections show this direct channel is central to output dynamics after monetary policy shocks.

Keywords: Interest rates; Firm investment; Survey experiment; Monetary policy; Narratives; Hurdle rate; Aggregate investment (search for similar items in EconPapers)
JEL-codes: D25 E43 E52 G31 (search for similar items in EconPapers)
Date: 2025-09
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