Investment and interest rates: An econometric dissection

Abstract

A simple structural model of Australian investment behavior based on Foley and Sidrauski's (1970) work is constructed and estimated by full information maximum likelihood. It is then used to assess in several steps the total effect of interest-rate changes on the rate of capital accumulation. The results indicate that investment is a little sensitive to changes in interest rates. Moreover, it appears that this insensitivity does not result from the low estimates of some key parameters, but rather from the interactions of many interrelated forces allowed for by the model once the rental price of capital and the return of capital are endogenized. © 1987.