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The Role of the Central Bank and Commercial Banks in Creating and Maintaining a Favorable Investment Climate in the Country

In: The Brusov–Filatova–Orekhova Theory of Capital Structure

Author

Listed:
  • Peter Brusov

    (Financial University under the Government of Russian Federation)

  • Tatiana Filatova

    (Financial University under the Government of Russian Federation)

  • Natali Orekhova

    (Financial University under the Government of Russian Federation)

Abstract

In this chapter, we study the role of the Central Bank and commercial banks in creating and maintaining 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 β and credit rate values kd. The cutoff 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 allows commercial banks to keep their credit rates below the cutoff credit rate kd* values in order to create and maintain a favorable investment climate in the country.

Suggested Citation

  • Peter Brusov & Tatiana Filatova & Natali Orekhova, 2023. "The Role of the Central Bank and Commercial Banks in Creating and Maintaining a Favorable Investment Climate in the Country," Springer Books, in: The Brusov–Filatova–Orekhova Theory of Capital Structure, chapter 0, pages 529-556, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-27929-4_24
    DOI: 10.1007/978-3-031-27929-4_24
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