Despite falling interest rates over the past decades, investment rates have not increased as standard economic theory would suggest. Niels Joachim Gormsen and Kilian Huber construct a global database of firm discount rates and cost of capital using corporate conference calls, and match this to investment rates. They find that changes in the cost of capital only modestly affect discount rates, giving rise to a time-varying wedge between the two measures. A standard model enriched with discount rate wedges helps resolve the 'investment puzzle' in the US. These findings have implications for modelling firm behaviour and for the design of policy by governments and monetary authorities.

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10 August 2023

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Vox EU

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https://cepr.org/voxeu/columns/firms-required-returns-capital-and-missing-investment-puzzle

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