MNI POLICY: Low-For-Long Blunts Spur to Investment: BOC Paper

Business investment may have become much less responsive to monetary stimulus in the low-for-long interest rate era following the 2008 financial crisis, Bank of Canada economists wrote in a research paper.

Major domestic firms have cut investment to 25 cents of every dollar earned since the crisis from 50 cents beforehand, creating a cumulative CAD100 billion shortfall between 2008 and 2017 based on previous trends in variables like cash flows or sales.

Companies rarely adjust the "hurdle rate" used to assess new projects, the paper found, citing literature from the U.S. and Australia. "This lack of adjustment could partially explain why investment has been lower than predicted as market interest rates have fallen."

"If this is the case, it also raises the question of how monetary policy impacts firm investment. This relates to the prevalent discussion in the literature on how monetary policy transmission may be weaker when interest rates are low," the researchers wrote. "To understand this better, in future work Bank staff will examine the effect of monetary policy surprises on corporate investment in Canada."

The "investment gap" doesn't mean firms are being irrational or spending less than they should, and it's still unclear what exactly has triggered the shift, the authors wrote. Managers may also be less certain about future profits or face tougher access to funding, for example.

The biggest single change the study found was a CAD60 billion decline in stock sales. There was a larger combined shift in the use of cash from a CAD35 billion hike in dividends and another CAD30 billion increase in cash holdings. Mark Carney when he was BOC Governor famously chided CEOs for hoarding "dead money" and challenged them to put it to better use.

The paper by Chris D'Souza, Timothy Grieder, Daniel Hyun, Jonathan Witmer was published on Friday. The Bank of Canada declined a request to interview one of the authors.