On the Interest Rate Sensitivity of Aggregate Investment in the Euro Zone

Abstract

The purpose of this paper is to estimate the response of aggregate investment to interest rate changes in the Euro zone. Keynesian macroeconomic theory assumes that there is an inverse relationship between investment and interest rates, but empirical evidence is inconclusive. Interestingly, there are no studies relating macroeconomic investment to central bank rates in the Euro zone, despite the importance of this question for European monetary policy. To check whether the inverse interest rate – investment nexus holds for the Euro zone we conducted a comprehensive econometric study. In particular, we estimated a modified accelerator model that related aggregate investment in levels and the investment-to GDP (gross domestic product) ratio to income, interest rates and a set of control variables. The model was estimated by OLS (ordinary least squares) and simultaneous-equations methods such as TSLS (two-stage least squares) and GMM (generalized method of moments). The study was unable to uncover a significant interest rate effect on investment in the Euro zone. Thus, there is little support for the expansionary monetary policy of the European Central Bank.

Green and Digital Transitions

“…The points were obtained in intervals that are realistic for an empirical study, for example, Oblath and Palócz (2020), Árvai and Menczel (2001), Reichel (2022). Hence, only 0.8% of the cases are economically relevant and consistent with the empirical literature.…”

Financing constraints and corporate investment decision: evidence from an emerging economy

“…Profitability, which denotes superior cost management, is one of the factors taken into account when making IDs (Ahmad et al , 2021), as its rise should cause an increase in investment. Supporting the accelerator theory, Reichel (2022) found that income is one of the investment determinants. Gordon and Iyengar (1996) discovered that return on investment (ROI) had a positive impact on IDs.…”

“…Investment here is proportional to output, so the expected output is the major determining factor of investment behavior. According to Reichel (2022) and Edeh et al (2023), the accelerator theory outperforms the other theories in terms of its model statistical fit and predictive power. The neoclassical theory basically describes the effect of the cost of capital on total investment.…”

Macroeconomic processes and expectations

“…Running a simulation with the conditions, I found 121,256 cases where both conditions are met within the specified intervals, which do not contain economic inconsistencies. I adjusted these case numbers by narrowing the interval of parameters to an economically relevant range, which is 𝑠̂= [0.1; 0.2], 𝑚 = [0.1: 0.1: 0.4], 𝑘 = [−0.1: 0.1: −0.4], is 𝑎 = [0.1; 0.2] The points were obtained in intervals that are realistic for an empirical study, for example, Oblath and Palócz (2020), Árvai and Menczel (2001), Reichel (2022). Hence, only 0.8% of the cases are economically relevant and consistent with the empirical literature.…”