Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter July 13, 2020

Is the Interest Rate Channel still working? Post-Crisis Evidence from German SMEs

  • Juliane Gerstenberger EMAIL logo
From the journal The Economists’ Voice

Abstract

Using a unique dataset from German small and medium-sized enterprises (SMEs), we test whether pessimistic business expectations have impeded the functioning of the interest rate channel during the post-crisis period. We estimate firms’ user cost elasticity of capital for the period 2008–2015, and test whether this elasticity differs for firms that hold pessimistic business expectations compared with those that hold positive expectations. Our results show that SMEs have significantly responded to changes in the user cost of capital during the post-crisis period. However, the results are mainly driven by SMEs that hold positive business expectations. Firms having neutral or negative expectations depict a much smaller user cost elasticity, which is not statistically different from zero. Our results reveal the limitations of an expansionary monetary policy and confirm the important role that expectations play for firms’ investment decisions.


Corresponding author: Juliane Gerstenberger, Universität Leipzig, Leipzig, 04109, Germany, E-mail:

References

Alm, B., and M. Meurers. 2015. “Wesentliche Fakten zur , “Investitionsschwäche” in Deutschland.” Wirtschaftsdienst 95 (1): 24–31. https://doi.org/10.1007/s10273-015-1773-3.Search in Google Scholar

Angeloni, I., A. K. Kashyap, and B. Mojon. 2003. Monetary Policy Transmission in the Euro Area: A study by the Eurosystem Monetary Transmission Network. Cambridge: Cambridge University Press.10.1017/CBO9780511492372Search in Google Scholar

Arellano, M., and S. Bond. 1991. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” The Review of Economic Studies 58 (2): 277–97. https://doi.org/10.2307/2297968.Search in Google Scholar

Arellano, M., and O. Bover. 1995. “Another Look at The Instrumental Variable Estimation of Error-Components models.” Journal of Econometrics 68 (1): 29–51. https://doi.org/10.1016/0304-4076(94)01642-d.Search in Google Scholar

Auerbach, A. 1983. “Taxation, Corporate Financial Policy and the Cost of Capital.” Journal of Economic Literature 21 (3): 905–40. https://doi.org/10.3386/w1026.Search in Google Scholar

Banerjee, R., J. Kearns, and M. J. Lombardi. 2015. “(Why) Is Investment Weak?.” BIS Quarterly Review 2015 (1): 67–82.Search in Google Scholar

Bernanke, B. S., and A. S. Blinder. 1992. “The Federal Funds Rate and the Channels of Monetary Transmission.” The American Economic Review 82 (4): 901–21.Search in Google Scholar

Bernanke, B. S., and M. Gertler. 1995. “Inside the Black Box: The Credit Channel of Monetary Policy Transmission.” The Journal of Economic Perspectives 9 (4): 27–48. https://doi.org/10.1257/jep.9.4.27.Search in Google Scholar

Blundell, R., and S. Bond. 1998. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models.” Journal of Econometrics 87 (1): 115–43. https://doi.org/10.1016/s0304-4076(98)00009-8.Search in Google Scholar

Boivin, J., M. T. Kiley, and F. S. Mishkin. 2010. How has the Monetary Transmission Mechanism Evolved Over Time? NBER Working Paper No. 15879, National Bureau of Economic Research.10.3386/w15879Search in Google Scholar

Bond, S. 2002. “Dynamic Panel Data Models: A Guide to Micro Data Methods and Practice.” Portuguese Economic Journal 1 (2): 141–62. https://doi.org/10.1007/s10258-002-0009-9.Search in Google Scholar

Bond, S., J. A. Elston, J. Mairesse, and B. Mulkay. 2003. “Financial Factors and Investment in Belgium, France, Germany and the United Kindom: A Comparison Using Company Panel Data.” The Review of Economics and Statistics 85 (1): 153–65. https://doi.org/10.1162/003465303762687776.Search in Google Scholar

Brayton, F., A. Levin, R. Lyon, and J. C. Williams. 1997. “The Evolution of Macro Models at the Federal Reserve Board.” Carnegie-Rochester Conference Series on Public Policy 47: 43–81. https://doi.org/10.1016/s0167-2231(98)00004-9.Search in Google Scholar

Büttner, T., and A. Hönig. 2011. Investment and Firm-specific Cost of Capital: Evidence from Firm-level Panel Data. TaxFACTs Schriftenreihe Nr. 2011-05, Friedrich-Alexander-Universität.Search in Google Scholar

Büttner, T., A. Hönig, B. Kauder, and M. Krause. 2015. Rahmenbedingungen für private Investitionen in Deutschland. Frankfurt: IMPULS-Stiftung.Search in Google Scholar

Chatelain, J.-B., A. Generale, I. Hernando, U. von Kalckreuth, and P. Vermeulen. 2001. Firm Investment and Monetary Policy Transmission in the Euro Area. ECB Working Paper Series No. 113, European Central Bank.10.2139/ssrn.303122Search in Google Scholar

Chatelain, J.-B., and A. Tiomo. 2001. Investment, the Cost of Capital, and Monetary Policy in the Nineties in France: A Panel Data Investigation. ECB Working Paper Series No. 106.Search in Google Scholar

Chirinko, R. S. 1993. “Business Fixed Investment Spending: Modelling Strategies, Empirical Results, and Policy Implications.” Journal of Economic Literature 31 (4): 1875–911.Search in Google Scholar

Chirinko, R. S., S. M. Fazzari, and A. P. Meyer. 1999. “How Responsive is Business Capital Formation to its User Cost? An Exploration with Micro Data.” Journal of Public Economics 74 (1): 53–80. https://doi.org/10.1016/S0047-2727(99)00024-9.Search in Google Scholar

Christiano, L. J., M. Eichenbaum, and C. Evans. 1996. “The Effects of Monetary Policy Shocks: Evidence from the F'ow of Funds.” The Review of Economics and Statistics 78 (1): 16–34. https://doi.org/10.2307/2109845.Search in Google Scholar

Coletti, D., R. Black, and J. Armstrong. 1996. The Bank of Canada’s New Quarterly Projection Model. Bank of Canada Technical Report 75, Bank of Canada.Search in Google Scholar

Cummins, J. G., and K. A. Hassett. 1992. “The Effects of Taxation on Investment: New Evidence from firm level Panel Data.” National Tax Journal 45 (3): 243–51.10.1086/NTJ41788967Search in Google Scholar

Cummins, J. G., K. A. Hassett, and R. G. Hubbard. 1994. “A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments.” Brookings Papers on Economic Activity 1994 (2): 1–74. https://doi.org/10.2307/2534654.Search in Google Scholar

Cummins, J. G., K. A. Hassett, and R. G. Hubbard. 1996. “Tax Reforms and Investment: A Cross-Country Comparison.” Journal of Public Economics 62 (1): 237–73. https://doi.org/10.1016/0047-2727(96)01580-0.Search in Google Scholar

Debarsy, N., C. Ertur, and J. P. LeSage. 2012. “Interpreting Dynamic Space–Time Panel Data Models.” Statistical Methodology 9 (1–2):158–71. https://doi.org/10.1016/j.stamet.2011.02.002.Search in Google Scholar

Dwenger, N. 2014. “User Cost Elasticity of capital revisited.” Economia 81: 161–86. https://doi.org/10.1111/ecca.12054.Search in Google Scholar

Dwenger, N., and F. Walch. 2014. Tax Losses and Firm Investment: Evidence from Tax Statistics. Beiträge zur Jahrestagung des Vereins fÃijr Socialpolitik 2011: Die Ordnung der Weltwirtschaft: Lektionen aus der Krise – Session: Fiscal Policy No. G11-V4.Search in Google Scholar

ECB. 2000. Monetary Policy Transmission in the Euro Area. ECB Monthly Bulletin July 2000, European Central Bank.Search in Google Scholar

ECB. 2008. The Role of Banks in the Monetary Policy Transmission. ECB Monthly Bulletin August 2008, European Central Bank.Search in Google Scholar

ECB. 2010. The ECB’s Response to the Financial Crisis. ECB Monthly Bulletin October 2010, European Central Bank.Search in Google Scholar

ECB. 2017. ECB Annual Report 2016. European Central Bank.Search in Google Scholar

Eckstein, O. 1965. “Manufacturing Investment and Business Expectations: Extensions of de Leeuw’s Results.” Econometrica 33 (2): 420. https://doi.org/10.2307/1909799.Search in Google Scholar

EIB. 2013. Investment and Investment Finance in Europe. Luxembourg: European Investment Bank.Search in Google Scholar

EIB. 2015. Investment and Investment Finance in Europe – Investing in Competitiveness. Luxembourg: European Investment Bank.Search in Google Scholar

EIB. 2016. Investment and Investment Finance in Europe – Financing Productivity Growth. Luxembourg: European Investment Bank.Search in Google Scholar

Eisner, R., and M. I. Nadiri. 1968. “Investment Behaviour and Neo-classical Theory.” The Review of Economics and Statistics 50 (3): 369–82. https://doi.org/10.2307/1937931.Search in Google Scholar

Fisher, I. 1930. The Theory of Interest. New York: Macmillan.Search in Google Scholar

Friedman, M., and A. J. Schwartz. 1963. A Monetary History of the United States, 1867-1960. Chicago: Princeton University Press for the NBER.Search in Google Scholar

Galí, J. 1992. “How Well does the IS-LM Model Fit Postwar U.S. Data?.” The Quarterly Journal of Economics 107 (2): 709–38. https://doi.org/10.2307/2118487.Search in Google Scholar

Gennaioli, N., Y. Ma, and A. Shleifer. 2016. “Expectations and Investment.” NBER Macroeconomics Annual 30 (1): 397–431. https://doi.org/10.3386/w21260.Search in Google Scholar

Gerstenberger, J., and M. Schwartz. 2014. Unsicherheit kostet mittelst Ãd'ndische Investitionen: Sichere Rahmenbedingungen nÃütig. Fokus Volkswirtschaft Nr. 66, KfW Economic Research.Search in Google Scholar

Gertler, M., and P. Karadi. 2014. Monetary Policy Surprises, Credit Costs and Economic Activity. NBER Working Paper No. 20224, National Bureau of Economic Research.10.3386/w20224Search in Google Scholar

Gould, J. P., and R. N. Waud. 1973. “The Neoclassical Model of Investment Behaviour: Another view.” International Economic Review 14 (1): 33–48. https://doi.org/10.2307/2526042.Search in Google Scholar

Harhoff, D., and F. Ramb. 2001. “Investment and Taxation in Germany: Evidence from Firm Level Panel Data.” In Investing Today for the World of Tomorrow, edited by Deutsche Bundesbank, 47–73. Berlin, Heidelberg.10.1007/978-3-642-56601-1_5Search in Google Scholar

Harrison, R., K. Nikolov, M. Quinn, G. Ramsay, A. Scott, and R. Thomas (2005). The Bank of England Quarterly Model. London: Bank of England.Search in Google Scholar

Hassett, K. A., and R. G. Hubbard. 2002. “Tax Policy and Business Investment.” In Handbook of Public Economics, Vol. 3, edited by Alan J. Auerbach and Martin Feldstein, 1293–343.Search in Google Scholar

Hayashi, F. 2000. “The Cost of Capital, Q, and the Theory of Investment Demand.” In Econometrics and the Cost of Capital, edited by L. J. Lau, The MIT Press.Search in Google Scholar

Heymann, E., and S. Schneider. 2017. Unsicherheit bremst Investitionen aus. Deutschland-Monitor, Deutsche Bank Research, Frankfurt am Main.Search in Google Scholar

Hicks, J. R. 1937. “Mr. Keynes and the Classics; A Suggested Interpretation.” Econometrica 5 (2): 147–59. https://doi.org/10.2307/1907242.Search in Google Scholar

Ireland, P. N. 2005. The Monetary Transmission Mechanism. Federal Reserve Bank of Boston Working Papers No. 06-1, Federal Reserve Bank of Boston.Search in Google Scholar

Jorgenson, D. W. 1963. “Capital Theory and Investment Behavior.” The American Economic Review 53 (2): 247–59.Search in Google Scholar

Jorgenson, D. W., and R. E. Hall. 1967. “Tax Uolicy and Investment Behavior.” The American Economic Review 57 (3): 391–414.Search in Google Scholar

Keynes, J. M. 1936. The General Theory of Employment Interest and Money. London: Palgrave Macmillan UK.Search in Google Scholar

King, M., and D. Fullerton. 1984. The Taxation of Income from Capital: A Comparative Study in the United States, the United Kingdom, Sweden, and West Germany. Chicago: University of Chicago Press.10.7208/chicago/9780226436319.001.0001Search in Google Scholar

Leeper, E. M., C. A. Sims, and T. Zha. 1996. “What Does Monetary Policy Do?.” Brookings Papers on Economic Activity 1996 (2): 1–63.10.2307/2534619Search in Google Scholar

Luennemann, P., and T. Mathae. 2001. Monetary Transmission: Empirical Evidence from Luxembourg Firm-level Data. ECB Working Paper Series No. 111, European Central Bank.10.2139/ssrn.356720Search in Google Scholar

Marshall, A. 1920. Principles of Economics, 8 ed. London: Macmillan and Co.Search in Google Scholar

Mishkin, F. S. 1995. “Symposium on the Monetary Transmission Mechanism.” Journal of Economic Perspectives 9 (4): 3–10.10.1257/jep.9.4.3Search in Google Scholar

Mojon, B., F. Smets, and P. Vermeulen. 2001. Investment and Monetary Policy in the Euro Area. ECB Working Paper Series No. 78, European Central Bank.10.2139/ssrn.356223Search in Google Scholar

Nickell, S. 1981. “Biases in Dynamic Models with Fixed Effects.” Econometrica 49 (6): 1417. https://doi.org/10.2307/1911408.Search in Google Scholar

Ricardo, D. 1817. On the Principles of Political Economy and Taxation. London: John Murray.Search in Google Scholar

Romer, C. D., and D. H. Romer. 1989. “Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz.” NBER Macroeconomics Annual 4: 121–84. https://doi.org/10.1086/654103.Search in Google Scholar

Roodman, D. 2009a. “How to Do Xtabond2: An Introduction to Difference and System GMM in Stata.” The Stata Journal 9 (1): 86–136. https://doi.org/10.1177/1536867x0900900106.Search in Google Scholar

Roodman, D. 2009b. “A Note on the Theme of Too Many Instruments.” Oxford Bulletin of Economics and Statistics 71 (1): 135–58. https://doi.org/10.1111/j.1468-0084.2008.00542.x.Search in Google Scholar

Sargent, T. J. 1972. “Rational Expectations and theTerm Structure of Interest Rates.” Journal of Money, Credit and Banking 4 (1): 74–97.10.2307/1991403Search in Google Scholar

Schwartz, M. 2015. Mit steigender Zuversicht aus dem Investitionstief. KfW-Mittelstandspanel 2015, KfW Economic Research.Search in Google Scholar

Schwartz, M., and J. Gerstenberger. 2014. Investitionen im Mittelstand noch im Plus, Großunternehmen schon lange im Minus. Fokus Volkswirtschaft Nr. 61, KfW Economic Research.Search in Google Scholar

Schwartz, M., and J. Gerstenberger. 2015. Alterung im Mittelstand bremst Investitionen. Fokus Volkswirtschaft Nr. 85, KfW Economic Research.Search in Google Scholar

Simmler, M. 2012. How Do Taxes Affect Investment When Firms Face Financial Constraints? DIW Discussion Papers No. 1181, Deutsches Institut für Wirtschaftspolitik.10.2139/ssrn.1980688Search in Google Scholar

Smith, A. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations, 5th ed. London: Methuen Co., Ltd.10.1093/oseo/instance.00043218Search in Google Scholar

Taylor, J. B. 1995. “The Monetary Transmission Mechanism: an Empirical framework.” Journal of Economic Perspectives 9 (4): 11–26. https://doi.org/10.1257/jep.9.4.11.Search in Google Scholar

von Kalckreuth, U. 2001. Monetary Transmission in Germany: New Perspectives on Financial Constraints and Investment Spending. ECB Working Paper Series No. 109, European Central Bank.10.2139/ssrn.299385Search in Google Scholar

Windmeijer, F. 2005. “A Finite Sample Correction for the Variance of Linear Efficient Two-Step GMM Estimators.” Journal of Econometrics 126 (1): 25–51. https://doi.org/10.1016/j.jeconom.2004.02.005.Search in Google Scholar

Received: 2020-02-11
Accepted: 2020-04-27
Published Online: 2020-07-13

© 2020 Walter de Gruyter GmbH, Berlin/Boston

Downloaded on 7.6.2023 from https://www.degruyter.com/document/doi/10.1515/ev-2020-0003/html
Scroll to top button