INVESTMENT SENSITIVITY: THE LEVEL EFFECTS OF INTEREST RATE AND UNCERTAINTY

Abstract

This paper shows that corporate investment sensitivity to interest rates is substantially influenced by the absolute level of interest rates and the uncertainties faced by firms. Using Korean data, we find that when the market interest rate is sufficiently low, interest rate variation has no effect on a firm's investment decisions. In addition, the sensitivity of corporate investment to the interest rate weakens when a firm is characterized by high performance uncertainty. Our study implies that under low market interest rates and uncertainty, monetary easing does not stimulate investment as expected. These results indicate that uncertainty must be eliminated and normal market interest rates must be recovered for monetary policy to be effective. © 2021. All Rights Reserved.