Impact of user cost of money on private investment in US

Our paper investigates the impact of the user cost of money, or the forgone interest associated with divisia monetary aggregates, on aggregate private investment in the U.S. We employ a mixed-frequency time-varying factor augmented vector autoregressive model with a large dataset spanning January 1972 to September 2023. Our impulse response function results show that the impact of the user cost of money is similar to that of interest rates, represented by the credit spread (the yield gap between Moody’s Baa corporate bond yield and the 10-year treasury bill yield). However, a shock to the user cost of M4 growth rate has a slightly stronger impact on disaggregated private investment growth than a credit spread shock. Hence, private investment is more responsive to the user cost of money than to interest rates in any economic environment. In this regard, when economic uncertainty is low, such as during the Great Moderation, shocks to interest rates or the M4 monetary aggregate growth rate have a significant positive impact on aggregate private investment growth. Our findings align with the literature on the relationship between interest rates and private investment (Bernanke, 1983b; Chetty, 2007).