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

Lena Best (), Benjamin Born () and Manuel Menkhoff ()
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Lena Best: Kiel University
Benjamin Born: University of Bonn
Manuel Menkhoff: University of Copenhagen

No 394, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

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 rates; aggregate investment (search for similar items in EconPapers)
JEL-codes: D25 E43 E52 G31 (search for similar items in EconPapers)
Pages: 82 pages
Date: 2026-03
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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:394

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