Review of Economic Studies Vol. 74 No. 1 2007
Interest Rates, Irreversibility, and Backward-Bending Investment
Abstract
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.
- DOI
- 10.1111/j.1467-937x.2007.00414.x
- Volume
- 74
- Issue
- 1
- Pages
- 67-91
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex