Interest Rates and Investment Redux

Simon Gilchrist, Egon Zakrajsek and Fabio Natalucci ()
Additional contact information
Egon Zakrajsek: Monetary Affairs Federal Reserve Board
Fabio Natalucci: Monetary Affairs Federal Reserve Board

No 126, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: The empirical difficulties associated with estimating the effects of changes in interest rates and corporate tax policy on business fixed investment are often blamed on a lack of identification. In this paper, we study the effect of variation in interest rates on investment spending, employing a large new panel data set that links yields on outstanding corporate bonds to the issuer income and balance sheet statements. The bond price data, based on trades in the secondary market, allow us to construct firm-specific measures of the marginal cost of external finance. Our results imply a robust and quantitatively important effect of real interest rates on the firm-level investment decisions. According to our estimates, a one-percentage-point increase in real interest rates is associated with the reduction in the average rate of capital spending between 70 to 130 basis points

JEL-codes: E22 E32 (search for similar items in EconPapers)
Date: 2006-07-04
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecfa:126

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