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http://www.businessinsider.com/business-investment-sensitivity-to-interest-rates-2014-1
Business investment (red line) has yet to accelerate, even though the Fed's main policy tool, the fed funds rate (blue line) has been pinned at zero since the recession.
New research by Federal Reserve staff economists Steve Sharpe and Gustavo Suarez suggests that the outlook for business investment — a notably lacking aspect of this economic recovery — has little to do with changes in interest rates.
"A fundamental tenet of investment theory and the traditional view of monetary policy transmission is that a rise in interest rates has a sizable negative effect on capital expenditures by businesses," write Sharpe and Suarez in a paper titled The Insensitivity of Investment to Interest Rates: Evidence from a Survey of CFOs.
"Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment."
In the paper, the economists examine data from the quarterly Duke University/CFO Magazine Global Business Outlook survey conducted in September 2012, which asked chief financial officers across companies of various sizes questions related to their spending plans.
The main findings:
The vast majority of CFOs indicate that their investment plans are quite insensitive to potential decreases in their borrowing costs. Only 8% of firms would increase investment if borrowing costs declined 100 basis points, and an additional 8% would respond to a decrease of 100 to 200 basis points.
Strikingly, 68% did not expect any decline in interest rates would induce more investment.
In addition, we find that firms expect to be somewhat more sensitive to an increase in interest rates. Still, only 16% of firms would reduce investment in response to a 100 basis point increase, and another 15% would respond to an increase of 100 to 200 basis points.
Read more: http://www.businessinsider.com/business-investment-sensitivity-to-interest-rates-2014-1#ixzz2qCHCg7Ph
Business investment (red line) has yet to accelerate, even though the Fed's main policy tool, the fed funds rate (blue line) has been pinned at zero since the recession.
New research by Federal Reserve staff economists Steve Sharpe and Gustavo Suarez suggests that the outlook for business investment — a notably lacking aspect of this economic recovery — has little to do with changes in interest rates.
"A fundamental tenet of investment theory and the traditional view of monetary policy transmission is that a rise in interest rates has a sizable negative effect on capital expenditures by businesses," write Sharpe and Suarez in a paper titled The Insensitivity of Investment to Interest Rates: Evidence from a Survey of CFOs.
"Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment."
In the paper, the economists examine data from the quarterly Duke University/CFO Magazine Global Business Outlook survey conducted in September 2012, which asked chief financial officers across companies of various sizes questions related to their spending plans.
The main findings:
The vast majority of CFOs indicate that their investment plans are quite insensitive to potential decreases in their borrowing costs. Only 8% of firms would increase investment if borrowing costs declined 100 basis points, and an additional 8% would respond to a decrease of 100 to 200 basis points.
Strikingly, 68% did not expect any decline in interest rates would induce more investment.
In addition, we find that firms expect to be somewhat more sensitive to an increase in interest rates. Still, only 16% of firms would reduce investment in response to a 100 basis point increase, and another 15% would respond to an increase of 100 to 200 basis points.
Read more: http://www.businessinsider.com/business-investment-sensitivity-to-interest-rates-2014-1#ixzz2qCHCg7Ph
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