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A Vectorautoregressive Investment Model (VIM) And Monetary Policy Transmission: Panel Evidence From German Firms

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Author Info
Joerg Breitung
Robert Chirinko ()
Ulf von Kalckreuth

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Abstract

This paper proposes a new framework for studying the effects of monetary policy on business investment. Important ambiguities with the modeling of investment dynamics and interactions between real and financial decisions suggest modeling investment spending as a VAR. Based on a panel of financial statement data for 6,408 German firms (44,345 datapoints) supplemented with user costs of capital and confidential measures of creditworthiness, we generate GMM estimates of a Vectorautoregressive Investment Model (VIM) containing investment, cash flow, sales, and the user cost of capital. We report four substantive findings. First, monetary policy matters, and business investment is responsive to interest rates embedded in the user cost of capital. Second, allowing real and financial decisions to interact raises the impact of monetary policy by one-third relative to simulations of an investment equation in isolation that assumes an exogenous financial policy. Third, the sensitivity of investment to cash flow shocks is raised by two-thirds relative to single equation computations appearing in the literature. Fourth, firms with poor credit ratings are ”paralyzed" in being unable to react to changing economic conditions as given by relative prices or demand. On the other hand and consistent with binding financing constraints, these endangered firms show a high responsiveness to cash flow shocks. Apart from these substantive conclusions, this paper demonstrate that the panel VAR approach is useful for modeling firm dynamics and real/financial interactions and for assessing monetary policy transmission.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0307.

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Date of creation: May 2003
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Handle: RePEc:emo:wp2003:0307

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  1. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Investment-Cash Flow Sensitivities Are Useful: A Comment On Kaplan And Zingales," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 695-705, May. [Downloadable!] (restricted)
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  4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier. [Downloadable!] (restricted)
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  5. Benito, Andrew & Garry Young, 2002. "Financial Pressure and Balance Sheet Adjustment by UK Firms," Royal Economic Society Annual Conference 2002 20, Royal Economic Society. [Downloadable!]
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  6. Bernanke, Ben & Gertler, Mark, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 87-114, February. [Downloadable!] (restricted)
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  7. Joe Peek & Eric S. Rosengren, 1995. "Is bank lending important for the transmission of monetary policy: an overview," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1-14. [Downloadable!]
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  8. Chirinko, Robert S., 1997. "Finance Constraints, Liquidity, and Investment Spending: Theoretical Restrictions and International Evidence," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 185-207, June. [Downloadable!] (restricted)
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  9. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  10. Coen, Robert M, 1969. "Tax Policy and Investment Behavior: Comment," American Economic Review, American Economic Association, vol. 59(3), pages 370-79, June.
  11. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints," NBER Working Papers 7659, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Fabio Schiantarelli, 1995. "Financial Constraints and Investment: A Critical Review of Methodological Issues and International Evidence," Boston College Working Papers in Economics 293., Boston College Department of Economics. [Downloadable!]
  13. Mishkin, Frederic S, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall. [Downloadable!] (restricted)
  14. Jean-Bernard Chatelain, 2003. "Structural Modelling of FinancialConstraints on Investment: Where Do WeStand?," Post-Print halshs-00112522_v1, HAL. [Downloadable!]
  15. Blanchard, Olivier Jean, 1990. "Why does money affect output? A survey," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 15, pages 779-835 Elsevier. [Downloadable!] (restricted)
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  16. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December. [Downloadable!] (restricted)
  18. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-40, September. [Downloadable!] (restricted)
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  19. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November. [Downloadable!] (restricted)
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  24. Anna Maria Agresti & Benoit Mojon, 2001. "Some stylised facts on the Euro area business cycle," Working Paper Series 095, European Central Bank. [Downloadable!]
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  1. Issouf Samaké, 2008. "Investment and Growth Dynamics: An Empirical Assessment Applied to Benin," IMF Working Papers 08/120, International Monetary Fund. [Downloadable!]
  2. Ulf von Kalckreuth, 2005. "Financial constraints and real activity: a non-structural approach using UK survey data," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 64-80 Bank for International Settlements. [Downloadable!]
  3. Allard Bruinshoofd, 2003. "Corporate Investment and Financing Constraints: Connections with Cash management," DNB Staff Reports (discontinued) 110, Netherlands Central Bank. [Downloadable!]
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  4. Ulf von Kalckreuth & Emma Murphy, . "Financial constraints and capacity adjustment in the United Kingdom: evidence from a large panel of survey data," Bank of England working papers 260, Bank of England. [Downloadable!]
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  5. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June. [Downloadable!]
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