Advanced Search
MyIDEAS: Login to save this paper or follow this series

Investment and the Real Interest Rate in Business Cycle Models

Contents:

Author Info

  • Virgiliu Midrigan

    (New York University)

  • Oleksiy Kryvtsov

    (Bank of Canada)

  • Chris Edmond

    (New York University)

Abstract

A pervasive prediction of business cycle models is that investment by firms in durable goods (capital, inventories) is highly sensitive to fluctuations in real interest rates (Thomas 2002, House 2007, Kryvtsov and Midrigan 2008). This prediction stands in sharp contrast with the data: investment is virtually insensitive to movements in interest rates. We ask: can an inventory-theoretic model of cash management by firms account for the low sensitivity of investment to interest rates in the data? In the model, a cash-in-advance constraint and frictions in the asset market lead firms to hold positive inventories of cash (low interest bearing liquid assets). These cash holdings disconnect the user cost of durable goods from the real interest rate and have the potential of reconciling the model's predictions with the data. We investigate this hypothesis by calibrating the model to account for patterns of cash holdings and investment in the Compustat firm-level data. We then study the model's aggregate implications.

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 862.

as in new window
Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:red:sed009:862

Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC

Related research

Keywords:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:sed009:862. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.