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The Impact of Interest: Firms' Investment Sensitivity to Interest Rates

Author

Listed:
  • Lena Best

    (Kiel University)

  • Benjamin Born

    (University of Bonn)

  • Manuel Menkhoff

    (University of Copenhagen)

Abstract

We study how firms’ investment responds to interest rate changes based on a German firm survey, combining hypothetical vignettes, open-ended questions, and rich firm data. We estimate a 7 percent semi-elasticity of investment to loan rates—about half the total corporate investment response to monetary policy shocks. Adjustment is heterogeneous: many firms do not react, citing cash buffers or a lack of opportunities, while adjusters revise sharply. Managers’ narratives about monetary policy transmission to investment emphasize direct borrowing-cost effects and rarely mention general-equilibrium channels. Local projections show this direct channel is central to output dynamics after monetary policy shocks.

Suggested Citation

  • Lena Best & Benjamin Born & Manuel Menkhoff, 2026. "The Impact of Interest: Firms' Investment Sensitivity to Interest Rates," ECONtribute Discussion Papers Series 394, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:394
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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_394_2026.pdf
    File Function: First version, 2026
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    Keywords

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    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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