Hostname: page-component-54dcc4c588-dbm8p Total loading time: 0 Render date: 2025-10-01T10:27:28.240Z Has data issue: false hasContentIssue false
  • English
  • Français

Impact of user cost of money on private investment in US

Published online by Cambridge University Press:  25 September 2025

Boniface Yemba ,
Biyan Tang  and
Dongfeng Chang Open the ORCID record for Dongfeng Chang [Opens in a new window]
Boniface Yemba
Affiliation:
Department of Finance, Economics, and International Business, Lewis College of Business, Marshall University, Huntington, WV, USA
Biyan Tang
Affiliation:
Department of Economics, University of Massachusetts Dartmouth, Dartmouth, MA, USA
Dongfeng Chang*
Affiliation:
School of Economics, Shandong University, Jinan, Shandong, China
*
Corresponding author: Dongfeng Chang; Email: dchang@sdu.edu.cn
Get access Rights & Permissions [Opens in a new window]

Abstract

Our paper investigates the impact of the user cost of money, or the forgone interest associated with divisia monetary aggregates, on aggregate private investment in the U.S. We employ a mixed-frequency time-varying factor augmented vector autoregressive model with a large dataset spanning January 1972 to September 2023. Our impulse response function results show that the impact of the user cost of money is similar to that of interest rates, represented by the credit spread (the yield gap between Moody’s Baa corporate bond yield and the 10-year treasury bill yield). However, a shock to the user cost of M4 growth rate has a slightly stronger impact on disaggregated private investment growth than a credit spread shock. Hence, private investment is more responsive to the user cost of money than to interest rates in any economic environment. In this regard, when economic uncertainty is low, such as during the Great Moderation, shocks to interest rates or the M4 monetary aggregate growth rate have a significant positive impact on aggregate private investment growth. Our findings align with the literature on the relationship between interest rates and private investment (Bernanke, 1983b; Chetty, 2007).

Keywords

Private investmentdivisia monetary aggregatesuser cost of monetary aggregatesFAVARmixed frequenciesE22E43E51

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e146
Copyright
© The Author(s), 2025. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Akhtar, M. (1983). Effects of interest rates and inflation on aggregate inventory investment in the United States. The American Economic Review 73(3), 319–328.Google Scholar
Ankargren, S., Unosson, M. and Yang, Y.. (2020). A flexible mixed-frequency vector autoregression with a steady-state prior. Journal of Time Series Econometrics 12(2), 1–41.10.1515/jtse-2018-0034CrossRefGoogle Scholar
Arif, S. and Lee, C. M.. (2014). Aggregate investment and investor sentiment. The Review of Financial Studies 27(11), 3241–3279.10.1093/rfs/hhu054CrossRefGoogle Scholar
Azzimonti, M. (2018). Partisan conflict and private investment. Journal of Monetary Economics 93, 114–131.10.1016/j.jmoneco.2017.10.007CrossRefGoogle Scholar
Banbura, M., Giannone, D., Modugno, M. and Reichlin, L.. (2013). Nowcasting with daily data. In Handbook of Economic Forecasting, pp. 195–237.Google Scholar
Banerjee, A., Marcellino, M. and Masten, I.. (2008). Forecasting Macroeconomic Variables Using Diffusion Indexes in Short Samples with Structural Change. Emerald Group Publishing Limited.10.1016/S1574-8715(07)00204-7CrossRefGoogle Scholar
Barnett, W. A. (1978). The user cost of money. Economics Letters 1(2), 145–149.10.1016/0165-1765(78)90051-4CrossRefGoogle Scholar
Barnett, W. A. (1980). Economic monetary aggregate: An application of index number and aggregation theory. Journal of Econometrics 14(1), 11.10.1016/0304-4076(80)90070-6CrossRefGoogle Scholar
Barnett, W. A. (1982). The optimal level of monetary aggregation. Journal of Money, Credit and Banking 14(4), 687–710.10.2307/1991556CrossRefGoogle Scholar
Barnett, W. A., Jones, B. E. and Nesmith, T. D.. (2008). Divisia second moments: An application of stochastic index number theory. Working paper Series in Theorical and Applied Economics 200803. University of Kansas, Department of Economics, revised Jul 2008.Google Scholar
Bates, B. J., Plagborg-Møller, M., Stock, J. H. and Watson, M. W.. (2013). Consistent factor estimation in dynamic factor models with structural instability. Journal of Econometrics 177(2), 289–304.10.1016/j.jeconom.2013.04.014CrossRefGoogle Scholar
Beccarini, A. (2007). Investment sensitivity to interest rates in an uncertain context: Is a positive relationship possible? Economic Change and Restructuring 40, 223–234.10.1007/s10644-007-9025-1CrossRefGoogle Scholar
Bernanke, B. S. (1983a). The determinants of investment: Another look. The American Economic Review 73(2), 71–75.Google Scholar
Bernanke, B. S. (1983b). Irreversibility, uncertainty, and cyclical investment. The Quarterly Journal of Economics 98(1), 85–106.10.2307/1885568CrossRefGoogle Scholar
Bitros, G. G. C. and Nadiri, M. I.. (2017). Elasticities of business investment in the us and their policy implications: A disaggregate approach to modeling and estimation. Working paper.Google Scholar
Blanchard, O., Rhee, C. and Summers, L.. (1993). The stock market, profit, and investment. The Quarterly Journal of Economics 108(1), 115–136.10.2307/2118497CrossRefGoogle Scholar
Breitung, J. and Eickmeier, S.. (2011). Testing for structural breaks in dynamic factor models. Journal of Econometrics 163(1), 71–84.10.1016/j.jeconom.2010.11.008CrossRefGoogle Scholar
Chetty, R. (2007). Interest rates, irreversibility, and backward-bending investment. The Review of Economic Studies 74(1), 67–91.10.1111/j.1467-937X.2007.00414.xCrossRefGoogle Scholar
Chiranjivi, G. and Sensarma, R.. (2023). The effects of economic and financial shocks on private investment: A wavelet study of return and volatility spillovers. International Review of Financial Analysis 90, 102936.10.1016/j.irfa.2023.102936CrossRefGoogle Scholar
Chowdhury, A. R. and Wheeler, M.. (2015). The impact of output and exchange rate volatility on fixed private investment: Evidence from selected G7 countries. Applied Economics 47(25), 2628–2641.10.1080/00036846.2015.1008761CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Evans, C. L.. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113(1), 1–45.10.1086/426038CrossRefGoogle Scholar
Cooley, T. F. and LeRoy, S. F.. (1985). Atheoretical macroeconometrics: A critique. Journal of Monetary Economics 16(3), 283–308.10.1016/0304-3932(85)90038-8CrossRefGoogle Scholar
Dal Bianco, M., Camacho, M. and Quiros, G. P.. (2012). Short-run forecasting of the euro-dollar exchange rate with economic fundamentals. Journal of International Money and Finance 31(2), 377–396.10.1016/j.jimonfin.2011.11.018CrossRefGoogle Scholar
Erenburg, S. J. (1993). The real effects of public investment on private investment. Applied Economics 25(6), 831–837.10.1080/00036849300000137CrossRefGoogle Scholar
Falk, N. and Shelton, C. A.. (2018). Fleeing a lame duck: Policy uncertainty and manufacturing investment in US States. American Economic Journal: Economic Policy 10(4), 135–152.Google Scholar
Fisher, I. (1922). The Making of Index Numbers: A Study of their Varieties, Tests, and Reliability. Vol. 1. Boston: Houghton Mifflin Company, Number. 1923 [c1922]Google Scholar
Jorgenson, D. (1971). Econometric studies of investment behavior: A review. Journal of Economic Literature, Investment 9(4), 1111–1147, Investment 1, ch. 12, pp. 423–478.Google Scholar
Jurado, K., Ludvigson, S. C. and Ng, S.. (2015). Measuring uncertainty. American Economic Review 105(3), 1177–1216.10.1257/aer.20131193CrossRefGoogle Scholar
Koop, G. and Korobilis, D.. (2014). A new index of financial conditions. European Economic Review 71, 101–116.10.1016/j.euroecorev.2014.07.002CrossRefGoogle Scholar
Kopp, E. (2018). Determinants of US Business Investment. International Monetary Fund.Google Scholar
Maccini, L. J., Moore, B. J. and Schaller, H.. (2004). The interest rate, learning, and inventory investment. American Economic Review 94(5), 1303–1327.10.1257/0002828043052295CrossRefGoogle Scholar
Mariano, R. S. and Murasawa, Y.. (2003). A new coincident index of business cycles based on monthly and quarterly series. Journal of Applied Econometrics 18(4), 427–443.10.1002/jae.695CrossRefGoogle Scholar
Mueller, G. and Pauley, K.. (1995). The effect of interest-rate movements on real estate investment trusts. Journal of Real Estate Research 10(3), 319–325.10.1080/10835547.1995.12090793CrossRefGoogle Scholar
Ng, S. and Perron, P.. (2001). Lag length selection and the construction of unit root tests with size and power. Econometrica 69(9), 1519–1554.10.1111/1468-0262.00256CrossRefGoogle Scholar
Pelgrin, F., Schich, S. and De Serres, A.. (2002). Increases in business investment rates in oecd countries in the 1990s: How much can be explained by fundamentals? OECD Economics Department Working Papers No. 327.Google Scholar
Peng, L. and Thibodeau, T. G.. (2020). Interest rates and investment: Evidence from commercial real estate. The Journal of Real Estate Finance and Economics 60, 554–586.10.1007/s11146-019-09699-8CrossRefGoogle Scholar
Schorfheide, F. and Song, D.. (2015). Real-time forecasting with a mixed-frequency VAR. Journal of Business & Economic Statistics 33(3), 366–380.10.1080/07350015.2014.954707CrossRefGoogle Scholar
Sharpe, S. A. and Suarez, G.. (2015). Why isn’t investment more sensitive to interest rates: evidence from surveys. Finance and Economics Discussions Series No. 2014-002. Divisions of Research & Statistics and Monetary Affairs. Federal Reserve Board.Google Scholar
Simmons-Süer, B. (2016). Cost of capital and US investment: Does financing matter after all? The Quarterly Review of Economics and Finance 60, 86–93.10.1016/j.qref.2015.11.008CrossRefGoogle Scholar
Stock, J. H. and Watson, M.. (2009). Forecasting in dynamic factor models subject to structural instability. In The Methodology and Practice of Econometrics. A Festschrift in Honour of David F. Hendry. Oxford University Press, pp. 1–57.10.1093/acprof:oso/9780199237197.003.0007CrossRefGoogle Scholar
Theil, H. (1967). Economics and information theory. Amsterdam: North-Holland Publishing Company.Google Scholar
Törnqvist, L. et al. (1936). The bank of finland’s consumption price index. Bank of Finland Monthly Bulletin, No. 10, pp. 1–8.Google Scholar
Yemba, B. P., Otunuga, O. M., Tang, B. and Biswas, N.. (2023). Nowcasting of the short-run euro-dollar exchange rate with economic fundamentals and time-varying parameters. Finance Research Letters 52, 103571.10.1016/j.frl.2022.103571CrossRefGoogle Scholar