Working Paper: NBER ID: w3495
Authors: Mark Gertler; Glenn Hubbard; Anil Kashyap
Abstract: We present a simple framework that incorporates a role for "interest rate spreads" in models of investment fluctuations. Formally, we develop a simple model of investment and financial contracting under asymmetric information that can he used to generate an Euler equation describing firms' intertemporal decisions about investment. The Euler equation is than estimated using data on U.S. producers' durable equipment investment. We find that during certain periods -- owing to agency-cost problems -- the basic Euler equation is violated, and shifts in interest rate differentials help predict investment. Thus, the empirical results lend support to models emphasizing how: (i) movements in agency costs of external finance can amplify investment fluctuation, and (ii) changes in the interest rate spread may signal movements in these agency costs.
Keywords: Interest Rate Spreads; Investment Fluctuations; Agency Costs
JEL Codes: E32; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interest rate spreads (E43) | agency costs of external finance (G24) |
| agency costs of external finance (G24) | investment fluctuations (G31) |
| interest rate spreads (E43) | investment fluctuations (G31) |