The missing corporate investment, are low interest rate to blame ?

Elliot Aurissergues (1)

1 PSE - Paris School of Economics

The aim of this paper is to understand the small effect of a long period of low real interest on corporate investment. I challenge the idea that corporate investment is sensitive to the wedge between the marginal product of capital and the user cost of capital. I provide a theoretical justification for an investment which is unresponsive to the wedge between marginal product of capital and real interest rate. I build an infinite horizon adverse selection model. Investment is constrained by cash flows. Next, I try to determinate if investment is a decreasing or an increasing function of interest rate once user cost channel is removed. I build a macroeconomic model where investment is a linear function of cash flows. I identify two channels by which real interest rate still affects investment: the entrepreneurial net worth channel and the precautionnary channel. The first one is well known and induces a negative relation between real interest rate and investment. The second is often neglected by the literature and can induce a positive relation. Under some calibration, investment response to real interest fall is negative. Then , I endogenize the credit constraint in the model. The response becomes unambiguously negative. I conclude by arguing that such a counterintuitive response should be taken seriously.

Mots clés: adverse selection; Financial frictions; risk spread; leverage; corporate investment

Domaines: Economies et finances

Elliot Aurissergues. The missing corporate investment, are low interest rate to blame ?. 2016. ⟨halshs-01348574v2⟩