Interest Rates and Backward-Bending Investment
This paper studies the effect of interest rates on investment in an environment where firms make irreversible investments and learn over time. In this setting, changes in the interest rate affect both the cost of capital and the cost of delaying investment. These two forces combine to generate an aggregate investment demand curve that is always a backward-bending function of the interest rate. At low rates, increasing the interest rate stimulates investment by raising the cost of delay. Existing evidence supports the hypothesis that firms change the time at which they invest in response to changes in interest rates. The model also generates a rich set of additional predictions that can be tested empirically.
|Date of creation:||Mar 2004|
|Date of revision:|
|Publication status:||published as Chetty, Raj. “Interest Rates and Backward-Bending Investment.” Review of Economic Studies 74, 1 (2007): 67-91.|
|Note:||EFG ME PE|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cabalero, R.J., 1997.
97-20, Massachusetts Institute of Technology (MIT), Department of Economics.
- Bertola, Guiseppe & Caballero, Ricardo J, 1994.
"Irreversibility and Aggregate Investment,"
Review of Economic Studies,
Wiley Blackwell, vol. 61(2), pages 223-46, April.
- Pindyck, Robert S., 1986.
"Irreversible investment, capacity choice, and the value of the firm,"
1802-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-85, December.
- Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
- Boyan Jovanovic & Peter L. Rousseau, 2004. "Interest Rates and Initial Public Offerings," NBER Working Papers 10298, National Bureau of Economic Research, Inc.
- Cukierman, Alex, 1980. "The Effects of Uncertainty on Investment under Risk Neutrality with Endogenous Information," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 462-75, June.
- Bischoff, Charles W, 1969. "Hypothesis Testing and the Demand for Capital Goods," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 354-68, August.
- Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
- Demers, Michel, 1991. "Investment under Uncertainty, Irreversibility and the Arrival of Information over Time," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 333-50, April.
- Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February.
- Marglin, Stephen A, 1970. "Investment and Interest: A Reformulation and Extension of Keynesian Theory," Economic Journal, Royal Economic Society, vol. 80(323), pages 910-31, December.
- Leahy, John V, 1993. "Investment in Competitive Equilibrium: The Optimality of Myopic Behavior," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 1105-33, November.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10354. 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: ()
If references are entirely missing, you can add them using this form.