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A simple alternative model for corporate investment

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  • Elliot Aurissergues

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

The aim of this paper is to provide a simple model in which fall in interest rate fails to increase ccorporate investment through the traditionnal user cost of capital channel. The motivation is the lack of empirical evidence for this channel and the ineffectiveness of the loose monetary policy with regard to corporate investment. I develop a simple model of adverse selection. It allows to microfound a linear relation between corporate investment and cash flow which "kills" the user cost channel. I solve the model analytically and find that lower interest rates decrease corporate investment.

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  • Elliot Aurissergues, 2017. "A simple alternative model for corporate investment," Working Papers hal-01558216, HAL.
    • Handle: RePEc:hal:wpaper:hal-01558216
    Note: View the original document on HAL open archive server: https://hal.science/hal-01558216v1
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