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The Interest Rate Sensitivity of Investment

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  2. Economics, Finance, Business & Management
  3. Credit and Capital Markets – Kredit und Kapital
  4. Vol. 52, Issue 2
  5. pp. 173–190

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Baldi, G., Lange, A. The Interest Rate Sensitivity of Investment. Credit and Capital Markets – Kredit und Kapital, 52(2), 173-190. https://doi.org/10.3790/ccm.52.2.173
Baldi, Guido and Lange, Alexander "The Interest Rate Sensitivity of Investment" Credit and Capital Markets – Kredit und Kapital 52.2, 2019, 173-190. https://doi.org/10.3790/ccm.52.2.173
Baldi, Guido/Lange, Alexander (2019): The Interest Rate Sensitivity of Investment, in: Credit and Capital Markets – Kredit und Kapital, vol. 52, iss. 2, 173-190, [online] https://doi.org/10.3790/ccm.52.2.173
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The Interest Rate Sensitivity of Investment

Baldi, Guido | Lange, Alexander

Credit and Capital Markets – Kredit und Kapital, Vol. 52 (2019), Iss. 2 : pp. 173–190

2 Citations (CrossRef)

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.52.2.173
Language
English
Pages
18
Keywords

Author Details

Guido Baldi, University of Bern, Department of Economics, Schanzeneckstr. 1, CH-3012 Bern, Switzerland; German Institute for Economic Research (DIW Berlin), D-10108 Berlin, Germany

Alexander Lange, Georg-August-Universität Göttingen, Faculty of Economic Sciences, Humboldtallee 3, 37073 Göttingen, Germany

Cited By

  1. Data‐driven identification in SVARs—When and how can statistical characteristics be used to unravel causal relationships?

    Herwartz, Helmut | Lange, Alexander | Maxand, Simone

    Economic Inquiry, Vol. 60 (2022), Iss. 2 P.668

    https://doi.org/10.1111/ecin.13035 [Citations: 7]

  2. Structural Changes in Investment and the Waning Power of Monetary Policy

    Bloesch, Justin | Weber, Jacob

    SSRN Electronic Journal , Vol. (2021), Iss.

    https://doi.org/10.2139/ssrn.3809439 [Citations: 1]

References

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  30. Uhlig, H. (2005): What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure. Journal of Monetary Economics Vol. 52(2), pp. 381–419.  Google Scholar
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  32. Willis, J. L./Cao, G. (2015): Has the U.S. Economy Become Less Interest Rate Sensitive?. Kansas City Fed  Google Scholar
  33. Backhouse, R. E./Boianovsky, M. (2016): Secular Stagnation: The History of a Macroeconomic Heresy. The European Journal of the History of Economic Thought, Vol. 23(6), pp. 946–970.  Google Scholar
  34. Bagliano, F. C./Favero, C. A. (1998): Measuring Monetary Policy with VAR Models: An Evaluation. European Economic Review, Vol. 42(6), pp. 1069–1112.  Google Scholar
  35. Bernanke, B. S./Blinder, A. S. (1992): The Federal Funds Rate and the Channels of Monetary Transmission. American Economic Review, Vol. 82(4), pp. 901–921.  Google Scholar
  36. Bernanke, B. S./Mihov, I. (1995): Measuring Monetary Policy. NBER Working Papers No. 5145, National Bureau of Economic Research.  Google Scholar
  37. Boeckx, J./Dossche, M./Peersman, G. (2017): Effectiveness and Transmission of the ECB’s Balance Sheet Policies. International Journal of Central Banking, Vol. 13(1), pp. 297–333.  Google Scholar
  38. Caballero, R. J. (1999): Aggregate Investment. In J. B. Taylor and M. Woodford (editors): Handbook of Macroeconomics, Vol. 1 of Handbook of Macroeconomics, Elsevier, chapter 12, pp. 813–862.  Google Scholar
  39. Candelon, B./Lütkepohl, H. (2001): On the Reliability of Chow Type Test for Parameter Constancy in Multivariate Dynamic Models. Economics Letters, Vol. 73, pp. 155–160.  Google Scholar
  40. Chirinko, R. S. (1993): Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications. Journal of Economic Literature, Vol. 31(4), pp. 1875–1911.  Google Scholar
  41. Christiano, L. J./Eichenbaum, M./Evans, C. L. (1999): Monetary Policy Shocks: What Have we Learned and to What End?. In J. B. Taylor and M. Woodford (editors): Handbook of Macroeconomics, Vol. 1 of Handbook of Macroeconomics, Elsevier, chapter 2, pp. 65–148.  Google Scholar
  42. Dickey, D. A./Fuller, W. A. (1979): Distribution of the Estimators for Autoregressive Time Series with a Unit Root, Journal of the American Statistical Association. Journal of the American Statistical Association, Vol. 74, pp. 427–431.  Google Scholar
  43. Doornik, J. A./Hendry, D. F. (1997): Modelling Dynamic Systems using PcFiml 9.0 for Windows. International Thomson Business Press.  Google Scholar
  44. Gali, J. (2010): Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and Its Applications. Princeton University Press, Second Edition.  Google Scholar
  45. Gilchrist, S./Zakrajsek, E. (2007): Investment and the Cost of Capital: New Evidence from the Corporate Bond Market. NBER Working Paper No. 13174, National Bureau of Economic Research.  Google Scholar
  46. Gudmundsson, M. (2017): Global Financial Integration and Central Bank Policies in Small, Open Economies. The Singapore Economic Review, Vol. 62(01), pp. 135–146.  Google Scholar
  47. Guiso, L./Kashyap, A./Panetta, F./Terlizzese, D. (2002): How Interest Sensitive is Investment? Very (When the Data are Well Measured). mimeo.  Google Scholar
  48. Hamilton, J. D. (1994): Time Series Analysis. Princeton University Press.  Google Scholar
  49. Hansen, P. R. (2003): Structural Changes in the Cointegrated Vector Autoregressive Model. Journal of Econometrics, Vol. 114(2), pp. 261–295.  Google Scholar
  50. Herwartz, H./Ploedt, M. (2016): Simulation Evidence on Theory-based and Statistical Identification under Volatility Breaks. Oxford Bulletin of Economics and Statistics, Vol. 78(1), pp. 94–112.  Google Scholar
  51. Hoerdahl, P./Sobrun, J./Turner, P. (2016): Low Long-term Interest Rates as a Global Phenomenon. BIS Working Papers No. 574, Bank for International Settlements.  Google Scholar
  52. Jorgenson, D. (1963): Capital Theory and Investment Behavior. American Economic Review, Vol. 53(2), pp. 247–259.  Google Scholar
  53. Klein, L. R. (1947): Theories of Effective Demand and Employment. Journal of Political Economy, Vol. 55, pp. 108–108.  Google Scholar
  54. Lanne, M./Lütkepohl, H. (2008a): A Statistical Comparison of Alternative Identification Schemes for Monetary Policy Shocks. EUI Working Papers 23.  Google Scholar
  55. Lanne, M./Lütkepohl, H. (2008b): Identifying Monetary Policy Shocks via Changes in Volatility. Journal of Money, Credit and Banking Vol. 40(6), pp. 1131–1149.  Google Scholar
  56. Lütkepohl, H. (2007): New Introduction to Multiple Time Series Analysis, Springer Publishing Company.  Google Scholar
  57. Lütkepohl, H./Netsunajev, A. (2014): Structural Vector Autoregressions with Smooth Transition in Variances: The Interaction Between U.S. Monetary Policy and the Stock Market. SFB 649 Discussion Paper 31.  Google Scholar
  58. Peersman, G. (2004): The Transmission of Monetary Policy in the Euro Area: Are the Effects Different Across Countries?’. Oxford Bulletin of Economics and Statistics, Vol. 66(3), pp. 285–308.  Google Scholar
  59. Rigobon, R. (2003): Identification Through Heteroskedasticity. The Review of Economics and Statistics Vol. 85(4), pp. 777–792.  Google Scholar
  60. Schaller, H. (2006): Estimating the Long-run User Cost Elasticity. Journal of Monetary Economics Vol. 53(4), pp. 725–736.  Google Scholar
  61. Sharpe, S. A./Suarez, G. A. (2013): The Insensitivity of Investment to Interest Rates: Evidence from a Survey of CFOs. Finance and Economics Discussion Series 2014–2, Board of Governors of the Federal Reserve System (U.S.).  Google Scholar
  62. Uhlig, H. (2005): What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure. Journal of Monetary Economics Vol. 52(2), pp. 381–419.  Google Scholar
  63. Wicksell, K. ([1898] 1936): Interest and Prices. New York: M. Kelley Publishers, 1965  Google Scholar
  64. Willis, J. L./Cao, G. (2015): Has the U.S. Economy Become Less Interest Rate Sensitive?. Kansas City Fed  Google Scholar

Abstract

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 find that the interest rate sensitivity of investment has been higher in the United States than in Europe, particularly in the first subperiod.

Table of Contents

Section Title Page Action Price
Guido Baldi / Alexander Lange: The Interest Rate Sensitivity of Investment 1
Abstract 1
Zusammenfassung: Die Zinssensitivität der Investitionen 1
I. Introduction 2
II. Data and Methodology 5
1. Data 5
2. Methodology 5
a) The VAR Model 5
b) Using Chow Tests to Detect Structural Breaks 6
c) Testing the Validity of the Identifying Strategy 7
III. Results 9
1. Testing the Appropriateness of the Identification Strategy 9
2. Impulse Responses for the Two Subperiods 12
IV. Conclusion 16
References 16

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