Financial Conditions and Capital Investment Choices

We show, both theoretically and empirically, that tight financial conditions shift investment toward cheaper but less energy-efficient capital. In a small open-economy model with vintage capital, higher financing costs reduce the present value of future energy savings, tilting firms' choices along a cost efficiency frontier. Using 150 years of macroeconomic and energy data from 17 advanced economies, we find that tighter financial conditions reduce output, capital, and total energy consumption, but raise the amount of energy per unit of capital (energy intensity), a composition effect that persists for 6 to 8 years. Tight financial conditions lower energy use in the short run by depressing activity, but increase energy use in the medium run through worse energy efficiency.

Suggested citation:

Jordà, Òscar, Fernanda Nechio, Toan Phan, and Felipe Schwartzman. 2026. "Financial Conditions and Capital Investment Choices." Federal Reserve Bank of San Francisco Working Paper 2026-05. https://doi.org/10.24148/wp2026-05