A simple alternative model for corporate investment

Elliot Aurissergues ()

Working Papers from HAL

Abstract: The aim of this paper is to provide a simple model in which fall in interest rate fails to increase ccorporate investment through the traditionnal user cost of capital channel. The motivation is the lack of empirical evidence for this channel and the ineffectiveness of the loose monetary policy with regard to corporate investment. I develop a simple model of adverse selection. It allows to microfound a linear relation between corporate investment and cash flow which "kills" the user cost channel. I solve the model analytically and find that lower interest rates decrease corporate investment.

Keywords: corporate investment; real interest rate; user cost of capital; financial frictions; adverse selection (search for similar items in EconPapers)
Date: 2017-06
Note: View the original document on HAL open archive server: https://hal.science/hal-01558216
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