The impact of interest rates on investment decisions in transition and developing economies

Анотація

Introduction. According to classical postulates, by changing the key interest rate (policy rate), the central bank influences the cost of debt capital, which, in turn, is reflected in investment activity within the economy. Indirectly, the level of the key rate also determines the expected rate of return on invested equity capital. Thus, monetary policy has a significant impact on the key parameters of the discount rate and on investment decisions. In the context of escalating geopolitical risks, the scientific testing of whether this thesis holds true for developing and emerging market economies, which include Ukraine, is a relevant issue. Problem Statement. Emerging Markets and Developing Economies (EMDEs) are characterized by heightened levels of macroeconomic uncertainty and investment risks, quasi-rational behaviour of financial market participants, a significant share of the shadow economy, an insufficiently developed capital market, and so on. Under such conditions, the capacity for monetary policy to influence investment decisions may be quite limited. The vast majority of research in this area focuses on developed economies, while the impact of the key rate and market interest rates on corporate investment in EMDEs has been insufficiently studied. This creates an informational vacuum in understanding the specifics of monetary influence on less mature financial markets and complicates the selection of adequate tools for stimulating investment activity. The purpose of this study is to conduct an empirical analysis of how monetary policy instruments – particularly the policy rate – affect corporate investment activity in EMDEs through the interest rate channel. Methods. The study employs a content analysis method, as well as a range of empirical methods, including fixed-effects regression models and pooled regression techniques. Results. The empirical analysis shows that increases in the real policy rate significantly reduce investment growth in transition economies, while in developing economies, this effect is weaker and less robust. Across all country groups, economic growth remains the key driver of investment activity. Geopolitical risk acts as an important restraining factor primarily for developing economies. Overall, the findings confirm the hypothesis that higher interest rates have a negative impact on corporate investment decisions in less mature financial markets. Conclusions. The research confirms that for the corporate sector in EMDEs, the ability to adapt investment decisions to fluctuations in interest rates and macroeconomic uncertainty is critical. The suggested tools – rate fixation, diversification of funding sources, scenario analysis of WACC, real options, and stress testing – enhance the resilience of corporate finance and allow for more effective management of long-term projects in a volatile monetary environment. Prospects for further research are associated with the analysis of sectoral specificities, the role of various institutional and macro-financial factors, as well as an in-depth study of the impact of geopolitical risks on investment behaviour in developing and transition economies.

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