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Do Interest Rates Affect Business Investment? Evidence from Australian Company-level Data

Author

Listed:
  • Jonathan Hambur

    (Reserve Bank of Australia)

  • Gianni La Cava

    (Reserve Bank of Australia)

Abstract

We examine the distribution of borrowing rates paid by companies, and the relationship between corporate borrowing rates and fixed capital investment, using a unique hand-collected dataset. We find a high degree of heterogeneity in companies' cost of debt. Also, since the global financial crisis, the spread between the rates paid by companies at the top and bottom of the distribution has widened. Borrowing rates for a large portion of companies, including smaller and riskier ones, have remained high in recent years, despite falls in aggregate indicators of interest rates. This heterogeneity in borrowing rates enables us to find a significant inverse relationship between the cost of debt and corporate investment, which is generally not evident in aggregate data. We argue that this relationship may be due to credit supply effects, as a relaxation of lending standards leads to lower credit spreads and encourages more investment. These findings shed new light on the link between monetary policy and business investment in Australia.

Suggested Citation

  • Jonathan Hambur & Gianni La Cava, 2018. "Do Interest Rates Affect Business Investment? Evidence from Australian Company-level Data," RBA Research Discussion Papers rdp2018-05, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2018-05
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    References listed on IDEAS

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    Cited by:

    1. Luke Hartigan & Michelle Wright, 2021. "Financial Conditions and Downside Risk to Economic Activity in Australia," RBA Research Discussion Papers rdp2021-03, Reserve Bank of Australia.
    2. Alexander Ballantyne & Tom Cusbert & Richard Evans & Rochelle Guttmann & Jonathan Hambur & Adam Hamilton & Elizabeth Kendall & Rachael McCririck & Gabriela Nodari & Daniel M. Rees, 2020. "MARTIN Has Its Place: A Macroeconometric Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 96(314), pages 225-251, September.
    3. Willem Vanlaer & Mattia Picarelli & Wim Marneffe, 2021. "Debt and Private Investment: Does the EU Suffer from a Debt Overhang?," Open Economies Review, Springer, vol. 32(4), pages 789-820, September.
    4. Luke Hartigan & Michelle Wright, 2023. "Monitoring Financial Conditions and Downside Risk to Economic Activity in Australia," The Economic Record, The Economic Society of Australia, vol. 99(325), pages 253-287, June.
    5. Gulnara Nolan & Jonathan Hambur & Philip Vermeulen, 2023. "Does Monetary Policy Affect Non-mining Business Investment in Australia? Evidence from BLADE," RBA Research Discussion Papers rdp2023-09, Reserve Bank of Australia.
    6. Dementiev, V., 2023. "Updating the technological base of the economy and real interest rates," Journal of the New Economic Association, New Economic Association, vol. 60(3), pages 104-119.
    7. David Rodgers & Jonathan Hambur, 2018. "The GFC Investment Tax Break," RBA Research Discussion Papers rdp2018-07, Reserve Bank of Australia.
    8. Jonathan Hambur & Dan Andrews, 2023. "Doing Less, with Less: Capital Misallocation, Investment and the Productivity Slowdown in Australia," RBA Research Discussion Papers rdp2023-03, Reserve Bank of Australia.

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    More about this item

    Keywords

    interest rates; investment; user cost of capital;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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