The Interest Rate Sensitivity of Investment

Baldi, Guido; Lange, Alexander (2019). The Interest Rate Sensitivity of Investment. Credit and Capital Markets, 52(2), pp. 173-190. Duncker & Humboldt 10.3790/ccm.52.2.173

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The interest rate sensitivity of investment has often played an important role in macroeconomic models. However, many vector autoregressive (VAR) models do not include investment to the list of variables. In this paper, we empirically investigate the size and the evolution of the interest rate sensitivity of investment for the United States and the four largest European economies in the last few decades. We use a VAR model with four variables at quarterly frequency: real investment, real gross domestic product (GDP), inflation, and a measure of the short-term interest rate. In our VAR, the structural interest rate shock is identified under the assumption that macroeconomic quantities and inflation react to interest rate innovations with a lag. We test the appropriateness of this specification by comparing our approach with the identification of shocks derived from the changes in volatility approach. For the countries under consideration, we determine a date during either the 1980s or the 1990s where the interest rate sensitivity of investment began to decrease and became less responsive to monetary policy. In addition, we findthat the interest rate sensitivity of investment has been higher in the United States than in Europe, particularly in the first subperiod.

Item Type:

Journal Article (Original Article)

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics
03 Faculty of Business, Economics and Social Sciences > Department of Economics > Institute of Economics > Macroeconomics

UniBE Contributor:

Baldi, Guido

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

ISSN:

2199-1227

Publisher:

Duncker & Humboldt

Language:

English

Submitter:

Dino Collalti

Date Deposited:

14 Apr 2020 17:31

Last Modified:

14 Apr 2020 17:31

Publisher DOI:

10.3790/ccm.52.2.173

URI:

https://boris.unibe.ch/id/eprint/138661

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