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

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.