The Impact of the Central Bank Key Rate and Commercial Banks Credit Rates on Creating and Maintaining of a Favorable Investment Climate in the Country

Authors

  • Peter Brusov Department of Data Analysis, Decision Making, and Financial Technology, Financial University Under the Government of Russian Federation, Moscow
  • Tatiana Filatova Department of Corporate Finance and Corporate Governance, Financial University Under the Government of Russian Federation, Moscow
  • Natali Orekhova Center of Corporate Finance, Investment, Taxation and Rating of the Research Consortium of Universities of the South of Russia, Rostov-on-Don
  • Veniamin Kulik Department of Financial Markets and Banks, Financial University under the Government of Russian Federation, Moscow
  • Irwin Weil Northwestern University, Evanston
  • Andrey Brailov Department of Data Analysis, Decision Making, and Financial Technology, Financial University Under the Government of Russian Federation, Moscow

Keywords:

Central Bank, commercial banks, a favorable investment climate, credit rate, key rate, profitability coefficient.

Abstract

Paper is devoted to study of the impact of the Central Bank key rate and commercial banks credit rates on creating and maintaining of a favorable investment climate in the country. Within the framework of modern investment models created by the authors, the dependence of the efficiency of investments on the level of debt financing within a wide range of values of equity costs and debt capital costs under different project terms (long-term projects as well as projects of arbitrary duration) and different investment profitability coefficients β is investigated. The effectiveness of investments is determined by Net Present Value, NPV. The study is conducted within the framework of investment models with debt repayment at the end of the project term. It is found that NPV depends practically linearly on leverage level L, increasing or decreasing depending on profitability coefficient b and credit rate values kd. The cut off credit rate values kd*, separating the range of increasing NPV(L) from range of decreasing NPV(L), are determined. The Central Bank should keep its key rate at the level which allow commercial banks keep their credit rates below the cut off credit rate kd* values in order to create and maintain a favorable investment climate in the country.

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Published

2018-11-12

Issue

Section

Special Issue - Banking System and Financial Markets of Russia and other Countries: Problems and Prospects