The Role of the Discount Rate in Investment and Employment Decisions

Stig Vinther Møller; Richard Priestley

doi:10.1017/S0022109021000715

The Role of the Discount Rate in Investment and Employment Decisions

Department of Economics and Business Economics

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review

1 Citation (Scopus)

Abstract

Time variation in the discount rate affects investment and employment decisions in a manner consistent with Q-theory predictions. This evidence is uncovered when using cyclical consumption as a proxy for the discount rate. The results, which are consistent across both U.S. and international data, suggest that firms respond rationally to variations in the cost of capital and that the discount rate has a substantial impact on macroeconomic dynamics and hence business cycle fluctuations.

Original language	English
Journal	Journal of Financial and Quantitative Analysis
Volume	58
Issue	2
Pages (from-to)	914-938
ISSN	0022-1090
DOIs	https://doi.org/10.1017/S0022109021000715
Publication status	Published - Mar 2023

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10.1017/S0022109021000715

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3915471

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title = "The Role of the Discount Rate in Investment and Employment Decisions",

abstract = "Time variation in the discount rate affects investment and employment decisions in a manner consistent with Q-theory predictions. This evidence is uncovered when using cyclical consumption as a proxy for the discount rate. The results, which are consistent across both U.S. and international data, suggest that firms respond rationally to variations in the cost of capital and that the discount rate has a substantial impact on macroeconomic dynamics and hence business cycle fluctuations.",

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AB - Time variation in the discount rate affects investment and employment decisions in a manner consistent with Q-theory predictions. This evidence is uncovered when using cyclical consumption as a proxy for the discount rate. The results, which are consistent across both U.S. and international data, suggest that firms respond rationally to variations in the cost of capital and that the discount rate has a substantial impact on macroeconomic dynamics and hence business cycle fluctuations.

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The Role of the Discount Rate in Investment and Employment Decisions

Abstract

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