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Interest Rate Spreads, Credit Constraints, and Investment Fluctuations: An Empirical Investigation

41 Pages Posted: 14 Jan 2001 Last revised: 22 Jul 2010

Mark Gertler

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

Date Written: October 1990

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.

Suggested Citation

Gertler, Mark and Hubbard, R. Glenn and Kashyap, Anil K., Interest Rate Spreads, Credit Constraints, and Investment Fluctuations: An Empirical Investigation (October 1990). NBER Working Paper No. w3495. Available at SSRN: https://ssrn.com/abstract=255329

Mark Gertler (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Robert Glenn Hubbard

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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Anil K. Kashyap

University of Chicago, Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Federal Reserve Bank of Chicago ( email )

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