Interest Rate Spreads, Credit Constraints, and Investment Fluctuations: An Empirical Investigation
New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)
R. Glenn Hubbard
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
Anil K. Kashyap
University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago
NBER Working Paper No. w3495
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.
Number of Pages in PDF File: 41
Date posted: January 14, 2001
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