Financial Conditions and Capital Investment Choices

Oscar Jorda, Fernanda Nechio, Toan Phan and Felipe Schwartzman

No 2026-05, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We show, both theoretically and empirically, that tight financial conditions shift investment toward cheaper but less energy-efficient capital. In a small open-economy model with vintage capital, higher financing costs reduce the present value of future energy savings, tilting firms’ choices along a cost efficiency frontier. Using 150 years of macroeconomic and energy data from 17 advanced economies, we find that tighter financial conditions reduce output, capital, and total energy consumption, but raise the amount of energy per unit of capital (energy intensity), a composition effect that persists for 6 to 8 years. Tight financial conditions lower energy use in the short run by depressing activity, but increase energy use in the medium run through worse energy efficiency.

Keywords: energy efficiency; capital vintages; monetary policy; interest rates; local projections; small open economy (search for similar items in EconPapers)
Pages: 53
Date: 2026-02-26
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DOI: 10.24148/wp2026-05

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