Non-convexities, Interest Rates and the Monetary Transmission Process

Russell Cooper and Jonathan Willis

No 1225, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the effects of interest rate movements on investment. In contrast to other studies, we focus on the implications of non-convex capital adjustment costs at the establishment level for the transmission of interest rate changes, perhaps induced by monetary policy, on investment spending. The dependence of plant-level investment decisions on interest rates is important both for understanding the smoothing effects of interest rate movements and the transmission of monetary policy. We introduce an interest rate process in the form of a stochastic discount factor that directly affects the decisions of the plant. In our analysis, we compare an empirically-based representation of the stochastic discount factor against a model-based representation. We find that that nonconvexities at the plant level have aggregate implications when using empirically consistent stochastic discount factors. As this work proceeds, we will examine how alternative monetary policies, which underly the interest rate process, influence investment behavior.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1225

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