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

  • 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. 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.
  2. 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.
  3. Guiso, Luigi, 1997. "High-Tech Firms and Credit Rationing," CEPR Discussion Papers 1696, C.E.P.R. Discussion Papers.
  4. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  5. Barran, Fernando & Peeters, Marga, 1998. "Internal finance and corporate investment: Belgian evidence with panel data," MPRA Paper 28504, University Library of Munich, Germany.
  6. Stephen Bond & Julie Ann Elston & Jacques Mairesse & Beno�t 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.
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