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The interest rate and crédit channels in Belgium: an investigation with micro-level firm data

Listed author(s):
  • Paxil Butzen
  • Catherine Fuss
  • Philip Vermeulen

This paper investigates the effects of monetary policy on firms' investment behaviour through the interest rate and credit channels. The analysis relies on a comprehensive database of Belgian firms covering all sectors of economic activity and firms of all sizes. We proceed in two steps. First, we estimate a reduced-form investment equation derived from the neoclassical model, augmented by cash flow. This equation gives us the sensitivity of investment to the user cost, sales and cash flow. This allows us to assess the relative importance of the interest rate and credit channels. We simulate the effect of a transitory change in the market interest rate on investment through changes in the user cost of capital and the cash flow-capital ratio. We additionally compute the long-run elasticity of the capital stock to the market interest rate. We perform both exercises for various sample splits according to sectors and sizes. Our results indicate that in the manufacturing and construction sector, small firms are more sensitive to monetary policy than large firms, that firms in the construction sector are more sensitive than firms in other sectors and that services firms are almost unaffected. The interest rate channel appears to be the dominant channel of monetary transmission; it accounts for 75% of the first-year effect of an interest rate change.

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Article provided by ULB -- Universite Libre de Bruxelles in its journal Brussels economic review.

Volume (Year): 45 (2002)
Issue (Month): 3 ()
Pages: 5-36

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Handle: RePEc:bxr:bxrceb:y:2002:v:45:i:3:p:5-35
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  1. Marc Deloof, 1998. "Internal Capital Markets, Bank Borrowing, and Financing Constraints: Evidence from Belgian Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(7&8), pages 945-968.
  2. Tychon, Pierre, 1997. "The Structure of Corporate Finance in Belgium: An Empirical Investigation," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1997019, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  3. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  4. Ehrmann, M., 2000. "Firm Size and Monetary Policy Transmission - Evidence from German Business Survey Data," Economics Working Papers eco2000/12, European University Institute.
  5. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  6. Jacques Mairesse & Bronwyn H. Hall & Benoit Mulkay, 1999. "Firm-Level Investment in France and the United States: An Exploration of What We Have Learned in Twenty Years," NBER Working Papers 7437, National Bureau of Economic Research, Inc.
  7. Barran, Fernando & Peeters, Marga, 1998. "Internal finance and corporate investment: Belgian evidence with panel data," MPRA Paper 28504, University Library of Munich, Germany.
  8. Maria Teresa Valderrama, 2002. "Credit Channel and Investment Behavior in Austria: A Micro-Econometric Approach," Working Papers 58, Oesterreichische Nationalbank (Austrian Central Bank).
  9. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  10. Stephen Bond & Costas Meghir, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Oxford University Press, vol. 61(2), pages 197-222.
  11. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-1460, September.
  12. Chatelain, Jean-Bernard & AndrÈ Tiomo, 2002. "Investment, the Cost of Capital, and Monetary Policy in the Nineties in France: A Panel Data Investigation," Royal Economic Society Annual Conference 2002 45, Royal Economic Society.
  13. Eugenio Gaiotti & Andrea Generale, 2001. "Does monetary policy have asymmetric effects? A look at the investment decisions of Italian firms," Temi di discussione (Economic working papers) 429, Bank of Italy, Economic Research and International Relations Area.
  14. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
  15. repec:adr:anecst:y:1999:i:55-56:p:02 is not listed on IDEAS
  16. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  17. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
  18. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  19. Guiso, Luigi, 1997. "High-Tech Firms and Credit Rationing," CEPR Discussion Papers 1696, C.E.P.R. Discussion Papers.
  20. repec:adr:anecst:y:1999:i:55-56 is not listed on IDEAS
  21. Max Gérard & Frédéric Verschueren, 2000. "The neoclassical synthesis of investment behaviour and the co-integration challenge, an experimentation with Belgian industry data," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 167, pages 299-344.
  22. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  23. R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
  24. Stephen Bond & Julie Ann Elston & Jacques Mairesse & Benoît Mulkay, 2003. "Financial Factors and Investment in Belgium, France, Germany, and the United Kingdom: A Comparison Using Company Panel Data," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 153-165, February.
  25. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
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