Benjamin Born (University of Bonn) - The Impact of Interest: Firms’ Investment Sensitivity to Interest Rates

Forskningsseminarier

Research Seminar - Benjamin Born (University of Bonn) - The Impact of Interest: Firms’ Investment Sensitivity to Interest Rates

Co-authors: Lea Best (ifo Institute and LMU Munich) and Manuel Menkhof (University of Copenhagen, ifo Institute, CEBI, and CESifo)

The Impact of Interest: Firms’ Investment Sensitivity to Interest Rates

Abstract
We study how firms’ investment responds to interest rate changes based on a German firm survey, combining hypothetical vignettes, open-ended questions, and rich firm data. We estimate a 7 percent semi-elasticity of investment to loan rates—about half the total corporate investment response to monetary policy shocks. Adjustment is heterogeneous: many firms do not react, citing cash buffers or a lack of opportunities, while adjusters revise sharply. Managers’ narratives about monetary policy transmission to investment emphasize direct borrowing-cost effects and rarely mention general-equilibrium channels. Local projections show this direct channel is central to output dynamics after monetary policy shocks.


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