The Role of Discount Rates in Investment and Employment Growth
55 Pages Posted: 12 Nov 2019
Date Written: November 1, 2019
We study the impact from time-varying risk premiums on real investment spending and employment. We use a new proxy for discount rate fluctuations and show for the first time that both short-run and long-run implications of dynamic labour market and investment models are confirmed in the data. In the short run, a decline in the discount rate implies both higher investment and employment growth, while the opposite pattern emerges in the long run, as predicted by theory. The effect from discount rates on investment and employment is strong both statistically and economically, suggesting that time-varying discount rates can be a key source of business cycle variations.
Keywords: discount rates, time-varying expected stock returns, investment growth, employment growth, adjustment costs
JEL Classification: E22, G12, J01
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