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The missing corporate investment, are low interest rate to blame ?

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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 des Ponts ParisTech - 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 understand the small effect of a long period of low real interest on corporate investment. I challenge the idea that corporate investment is sensitive to the wedge between the marginal product of capital and the user cost of capital. I provide a theoretical justification for an investment which is unresponsive to the wedge between marginal product of capital and real interest rate. I build an infinite horizon adverse selection model. Investment is constrained by cash flows. Next, I try to determinate if investment is a decreasing or an increasing function of interest rate once user cost channel is removed. I build a macroeconomic model where investment is a linear function of cash flows. I identify two channels by which real interest rate still affects investment: the entrepreneurial net worth channel and the precautionnary channel. The first one is well known and induces a negative relation between real interest rate and investment. The second is often neglected by the literature and can induce a positive relation. Under some calibration, investment response to real interest fall is negative. Then , I endogenize the credit constraint in the model. The response becomes unambiguously negative. I conclude by arguing that such a counterintuitive response should be taken seriously.

Suggested Citation

  • Elliot Aurissergues, 2016. "The missing corporate investment, are low interest rate to blame ?," Working Papers halshs-01348574, HAL.
    • Handle: RePEc:hal:wpaper:halshs-01348574
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01348574v2
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    References listed on IDEAS

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    Cited by:

    1. Umar Farooq & Jaleel Ahmed & Shamshair Khan, 2021. "Do the macroeconomic factors influence the firm's investment decisions? A generalized method of moments (GMM) approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 790-801, January.

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    Keywords

    adverse selection; Financial frictions; risk spread; leverage; corporate investment;
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