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Interest Rates and Investment Redux


  • Simon Gilchrist

    (Boston University)

  • Egon Zakrajsek

    (Monetary Affairs Federal Reserve Board)

  • Fabio Natalucci

    () (Monetary Affairs Federal Reserve Board)


The empirical difficulties associated with estimating the effects of changes in interest rates and corporate tax policy on business fixed investment are often blamed on a lack of identification. In this paper, we study the effect of variation in interest rates on investment spending, employing a large new panel data set that links yields on outstanding corporate bonds to the issuer income and balance sheet statements. The bond price data, based on trades in the secondary market, allow us to construct firm-specific measures of the marginal cost of external finance. Our results imply a robust and quantitatively important effect of real interest rates on the firm-level investment decisions. According to our estimates, a one-percentage-point increase in real interest rates is associated with the reduction in the average rate of capital spending between 70 to 130 basis points

Suggested Citation

  • Simon Gilchrist & Egon Zakrajsek & Fabio Natalucci, 2006. "Interest Rates and Investment Redux," Computing in Economics and Finance 2006 126, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:126

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    References listed on IDEAS

    1. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters,in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
    2. Almeida, Heitor & Bonomo, Marco, 2002. "Optimal state-dependent rules, credibility, and inflation inertia," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1317-1336, October.
    3. Jeffery D. Amato & Thomas Laubach, 1999. "Monetary policy in an estimated optimization-based model with sticky prices and wages," Research Working Paper 99-09, Federal Reserve Bank of Kansas City.
    4. Sergio A. L. Alves & Waldyr D. Areosa, 2005. "Targets and Inflation Dynamics," Working Papers Series 100, Central Bank of Brazil, Research Department.
    5. Andrew Caplin & John Leahy, 1991. "State-Dependent Pricing and the Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 683-708.
    6. Marco Bonomo & René Garcia, 2001. "The macroeconomic effects of infrequent information with adjustment costs," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 18-35, February.
    7. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March.
    8. Chakrabarti, Rajesh & Scholnick, Barry, 2005. "Nominal rigidities without literal menu costs: evidence from E-commerce," Economics Letters, Elsevier, vol. 86(2), pages 187-191, February.
    9. Simon Hall & Mark Walsh & Anthony Yates, 1997. "How do UK companies set prices?," Bank of England working papers 67, Bank of England.
    10. Mark J. Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 514-533, May.
    11. Marc Giannoni & Michael Woodford, 2004. "Optimal Inflation-Targeting Rules," NBER Chapters,in: The Inflation-Targeting Debate, pages 93-172 National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles


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