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Interest Rates and Investment Redux

Listed author(s):
  • 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

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 126.

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Date of creation: 04 Jul 2006
Handle: RePEc:sce:scecfa:126
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