# Investment sensitivity to interest rates in an uncertain context: is a positive relationship possible?

Article

First Online:

Received:

Accepted:

- 179 Downloads
- 3 Citations

## Abstract

This paper shows a non-linear relationship between investment and interest rates under uncertainty. Since the interest rate’s variance is positively related to the investment’s value (through the discount factor) and, generally, is also positively related to the interest rate’s level, then, at the same time, a negative (classical) and a positive (through the interest rate’s variance) relationship links interest rates to investment. Hence, an ultimate and even positive relationship between investment and interest rates’ (expected) level may occur. A specific model is proposed and the conditions upon which the positive effect occurs are derived. Some estimates are also proposed.

## Keywords

NPV Interest rates models*GMM*

*GARCH*model Threshold model

## JEL Classification

E22 E43 G31## References

- Ahn D-H, Gao B (1999) A parametric non-linear model of the term structure dynamic. Rev Financ Stud 12:721–762CrossRefGoogle Scholar
- Ball L, Cecchetti SG (1990) Inflation and uncertainty at short and long horizons. Brookings Pap Econ Act 1:215–254CrossRefGoogle Scholar
- Bollerslev T (1992) ARCH modelling in finance: a review of the theory and empirical evidence. J Econom 52:5–59CrossRefGoogle Scholar
- Calcagnini G, Saltari E (2000) Real and financial uncertainty and investment decisions. J Macroecon 22:491–514CrossRefGoogle Scholar
- Capozza D, Li Y (2001) Residential investment and interest rates: an empirical test of development as a real option. Real Estate Econ 29:3CrossRefGoogle Scholar
- Carruth A, Dickerson A, Henley A (2000) What do we know about investment under uncertainty? J Econ Surv 14:119–153CrossRefGoogle Scholar
- Chan KG, Karolyi GA, Longstaff FA, Sanders AB (1992) An empirical comparison of alternative models of the short-term interest rate. J Finance 47:1209–1227CrossRefGoogle Scholar
- Chetty R (2004) Interest rates and backward-bending investment. NBER W.P. no 10354Google Scholar
- Cochrane JH, (2001) Asset pricing. Princeton University Press, PrincetonGoogle Scholar
- Cox CJ, Ingersoll JE, Ross SA (1985) A theory of the term structure of interest rates. Econometrica 53:385–407CrossRefGoogle Scholar
- Dixit AK, Pyndick RS (1994) Investment under uncertainty. Princeton University Press, PrincetonGoogle Scholar
- Fischer S (1993) The role of macroeconomic factors in growth. J Monet Econ 32:485–512CrossRefGoogle Scholar
- Fisher I (1896) Appreciation and interest. Macmillan, New YorkGoogle Scholar
- Franses PH, van Dijk V (2000) Non-linear time series models in empirical finance. Cambridge University Press, CambridgeGoogle Scholar
- Granger CWJ, Terasvirta T (1993) Modelling nonlinear economic relationships. Oxford University Press, OxfordGoogle Scholar
- Hansen LP (1982) Large sample properties of the generalized method of moments estimators. Econometrica 50:1029–1054CrossRefGoogle Scholar
- Leahy JV, Whited TM (1996) The effect of uncertainty on investment: some stylised facts. J Money Credit Bank 28:65–83CrossRefGoogle Scholar
- Lucas RE Jr (1972) Expectations and the neutrality of money. J Econ Theory 4:103–124CrossRefGoogle Scholar
- McCulloch JH, Kwon HC (1993) US term structure database. Ohio State University Working Paper 93-6Google Scholar
- Romer D (2001) Advanced macroeconomics. Mc Graw HillGoogle Scholar
- Rose C (2000) The I-r Hump: irreversible investment under uncertainty. Oxf Econ Pap 52:626–636CrossRefGoogle Scholar
- Tzavalis E, Wickens MR (1996) Forecasting inflation from the term structure. J Empir Finance 3:103–122CrossRefGoogle Scholar
- Walsh CE (2003) Monetary theory and policy. The MIT PressGoogle Scholar

## Copyright information

© Springer Science+Business Media, LLC. 2007