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A Vectorautoregressive Investment Model (VIM) and Monetary Policy Transmission: Panel Evidence from German Firms

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Listed author(s):
  • von Kalckreuth, Ulf
  • Chirinko, Robert S.
  • Breitung, Jörg

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). It contains investment and cash flow as endogenous variables, and the user costs of capital and sales growth as additional explanatory variables. 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 twothirds relative to single equation computations. Fourth, firms with poor credit ratings are "paralysed" 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 Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2003,06.

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Date of creation: 2003
Handle: RePEc:zbw:bubdp1:4201
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Keywords: Monetäre Transmission; Panel VAR's; einzelwirtschaftliche Investitionen; Deutschland; Monetary Policy Transmission; Panel Data VAR's; Firm-Level Investment; Germany;

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Find related papers by JEL classification:
  • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
  • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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Cited by:

  1. Issouf Samaké, 2008. "Investment and Growth Dynamics; An Empirical Assessment Applied to Benin," IMF Working Papers 08/120, International Monetary Fund.
  2. Allard Bruinshoofd, 2003. "Corporate Investment and Financing Constraints: Connections with Cash management," DNB Staff Reports (discontinued) 110, Netherlands Central Bank.
  3. von Kalckreuth, Ulf & Murphy, Emma, 2005. "Financial constraints and capacity adjustment in the United Kingdom: Evidence from a large panel of survey data," Discussion Paper Series 1: Economic Studies 2005,01, Deutsche Bundesbank, Research Centre.
  4. 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.
  5. 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.
  6. Seok-Kyun Hur, 2005. "Money Growth and Interest Rates," NBER Working Papers 11102, National Bureau of Economic Research, Inc.

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