Journal Article

Interest Rates, Irreversibility, and Backward-Bending Investment

Raj Chetty

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 1, pages 67-91
Published in print January 2007 | ISSN: 0034-6527
Published online January 2007 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00414.x
Interest Rates, Irreversibility, and Backward-Bending Investment

More Like This

Show all results sharing these subjects:

  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Corporate Governance

GO

Show Summary Details

Preview

This paper studies the effect of interest rates on investment in an environment where firms make irreversible investments with uncertain pay-offs. In this setting, changes in the interest rate affect both the cost of capital and the cost of delaying investment to acquire information. These two forces combine to generate an aggregate investment demand curve that is a backward-bending function of the interest rate. At low rates, increasing the interest rate raises investment by increasing the cost of delay.

Keywords: E22; G31

Journal Article.  11136 words.  Illustrated.

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Corporate Governance

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.