Template-Type: ReDIF-Paper 1.0
Title: The Impact of Interest: Firms’ Investment Sensitivity to Interest Rates
Author-Name: Lea Best
Author-Email: best@ifo.de
Author-Name: Benjamin Born
Author-Email: b.born@uni-bonn.de
Author-Name: Manuel Menkhof
Author-Email: mmk@econ.ku.dk

Classification-JEL: D25, E43, E52, G31
Keywords: Interest rates, firm investment, survey experiment, monetary policy,
narratives, hurdle rates, aggregate investment

Abstract: We study how firms’ investment responds to interest rate changes based on a German
firm survey, combining hypothetical vignettes, open-ended questions, and rich firm data.
We estimate a 7 percent semi-elasticity of investment to loan rates—about half the total
corporate investment response to monetary policy shocks. Adjustment is heterogeneous:
many firms do not react, citing cash buffers or a lack of opportunities, while adjusters
revise sharply. Managers’ narratives about monetary policy transmission to investment
emphasize direct borrowing-cost effects and rarely mention general-equilibrium channels.
Local projections show this direct channel is central to output dynamics after monetary
policy shocks.

Note: 
Length: 82
Creation-Date: 2026-03
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp737
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2025_737