The Role of Discount Rates in Investment and Employment Growth

55 Pages Posted: 12 Nov 2019

See all articles by Stig Vinther Møller

Stig Vinther Møller

Aarhus University - CREATES

Richard Priestley

Norwegian Business School

Date Written: November 1, 2019

Abstract

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

Suggested Citation

Møller, Stig Vinther and Priestley, Richard, The Role of Discount Rates in Investment and Employment Growth (November 1, 2019). Available at SSRN: https://ssrn.com/abstract=3479111 or http://dx.doi.org/10.2139/ssrn.3479111

Stig Vinther Møller (Contact Author)

Aarhus University - CREATES ( email )

Nordre Ringgade 1
Aarhus, DK-8000
Denmark

Richard Priestley

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

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