WORKING PAPER NO. 78 INVESTMENT AND MONETARY POLICY IN THE EURO AREA BY BENOIT MOJON, FRANK SMETS AND PHILIP VERMEULEN

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1 EUROPEAN CENTRAL BANK WORKING PAPER SERIES E C B E Z B E K T B C E E K P WORKING PAPER NO. 78 INVESTMENT AND MONETARY POLICY IN THE EURO AREA BY BENOIT MOJON, FRANK SMETS AND PHILIP VERMEULEN October 2001

2 EUROPEAN CENTRAL BANK WORKING PAPER SERIES WORKING PAPER NO. 78 INVESTMENT AND MONETARY POLICY IN THE EURO AREA * BY BENOIT MOJON, FRANK SMETS AND PHILIP VERMEULEN October 2001 * We have benefited from discussions at the Conference on Financial structure, bank behaviour and monetary policy in the EMU held in Groningen (2000), and in particular from the comments by our discussant Gerard Kuper.Valuable comments were also received from Jean-Bernard Chatelain, Bob Chirinko, Robert Lensink, Elmer Sterken, an anonymous referee and participants in the Eurosystem Monetary Transmission Network. Corresponding author: Philip Vermeulen, DG-Research, ECB, Kaiserstrasse 29, D Frankfurt am Main; philip.vermeulen@ecb.int.the views expressed in this paper only reflect those of the authors and not necessarily those of the European Central Bank.

3 European Central Bank, 2001 Address Kaiserstrasse 29 D Frankfurt am Main Germany Postal address Postfach D Frankfurt am Main Germany Telephone Internet Fax Telex ecb d All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank. ISSN

4 Contents Abstract 4 Non-technical summary 5 1 Introduction 6 2 Estimation methodologie 8 3 The Data The Bach database Definition of the user cost of capital Investment, the user cost of capital and balance sheet indicators 12 4 Results The dynamic neoclassical model The average interest rate on debt and monetary policy Size and the effect of the user cost on investment 15 5 Conclusion 16 6 Appendix: data sources, data construction and cleaning Construction of the sample Construction of the variables List of the industries used 18 Tables 21 Charts 26 European Central Bank Working Paper Series 28 ECB Working Paper No 78 October

5 Abstract This paper analyses the effects of a change in monetary policy on firms investment in Germany, France, Italy and spain using data set which provides aggregated balance sheet and profit and loss account data for 17 different industries and 3 different siz classes. The main findings are twofold. First, in each of the four countries a change in the user cost of capital, which in turn is affected by interest rates, has both statistically and economically significant effects on investment. Second, while the average interest rate on debt is generally higher for small firms than for large firms, there is little evidence that the effects of monetary policy on small firms are larger. JEL classification system: E52 Keywords: investment; cost of capital; monetary transmission; euro area 4 ECB Working Paper No 78 October 2001

6 NON TECHNICAL SUMMARY A good understanding of the monetary transmission mechanism in the euro area is important for the efficient implementation of the ECB s single monetary policy. While there is a large literature that has focused on the macro-economic consequences of a change in policy-controlled interest rates in the various euro area countries, much less comparative work has been done based on micro-economic evidence. In this paper we analyse the effects of interest rate changes on industry-specific investment behaviour in the four largest euro area countries (Germany, France, Italy and Spain). We use the BACH database: a semi-aggregate dataset on firm s balance sheets assembled by the European Commission. The data comprises 17 industries for each country. For each country we have disaggregated balance sheet information for three different firm-size classes. A disaggregated analysis of investment behaviour in the euro area is useful for at least two reasons. First, it has proven to be very difficult to find significant interest rate effects on investment using aggregate data. Using the cross-sectional variation in disaggregated data, it may be easier to identify such interest rate effects. Moreover, for the euro area there is hardly any micro-economic evidence on the elasticity of investment with respect to the user cost of capital. Second, disaggregation also allows one to test whether the effects of monetary policy are different across sectors. Testing for heterogeneity may provide information about the different channels (interest rate versus balance sheet channels) through which monetary policy may impact on investment. With the BACH data set, we first estimate a neo-classical investment model. In such a model, investment is solely a function of sales and user cost. We specifically examine the long run elasticity of investment with respect to sales and with respect to the user cost of capital. Our results indicate that in the long run industry technology can be approximated by a Cobb-Douglas function. Such a specification implies that a one percent increase in sales or a one percent fall in the user cost leads to a one percent rise in the capital stock. We obtain a higher user cost elasticity of investment than is usually the case in micro panel studies. Overall the effects of the user cost on investment suggest that a traditional interest rate channel is operative in the euro area. We further investigate whether there are significant differences between firms of different size. Although we do find that small firms pay on average higher interest rates, we do not find evidence that the premium small firms pay reacts to interest rate changes. We also do not find systematic differences between large and small firms in the reaction of investment to user cost changes. These findings put doubt on the possibility that accelerator phenomena might play an important role in the transmission mechanism in the largest euro area countries. ECB Working Paper No 78 October

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10 lwv orqj uxq ghvluhg ohyho dv jlyhq lq htxdwlrq +4,1 Wkh orqj0uxq hodvwlflwlhv duh jlyhq : 9 ; 9 1 Ilqdoo / xvlqj wkh uhodwlrqvkls ehwzhhq wkh qhw jurzwk udwh ri wkh fdslwdo vwrfn +n l>w, dqg wkh jurvv lqyhvwphqw udwlr +LN l>w, dqg wkh ghsuhfldwlrq udwh + l,/ +n LN l>w l,/ zh rewdlq wkh edvlf vshflfdwlrq hvwlpdwhg lq wklv sdshu= LN w l 4 LN l>wã4 5 v l>w 6 v l>wã4 7 xf l>w 8 xf l>wã4 9 n l>wã5 : v l>wã5 ; xf l>wã5 % l>w +6, w lv d wlph0vshflf {hg hhfw zklfk pd fdswxuh djjuhjdwh ghyhorsphqwv lq surgxfwlylw / zkloh l lv dq xqrevhuyhg lqgxvwu {hg hhfw zklfk pd fdswxuh lqgxvwu 0vshflf ghsuhfldwlrq udwhv1 ; l>w lv d vhuldoo xqfruuhodwhg huuru whup zklfk lv dovr xqfruuhodwhg zlwk doo sdvw yduldeohv1 Wklv vshflfdwlrq ri wkh qhrfodvvlfdo prgho lv suhihuuhg ryhu wkh Hxohu vshf0 lfdwlrq/ edvlfdoo iru lwv vlpsolflw 1 Wklv lv ri lpsruwdqfh jlyhq wkh olplwhg vl}h ri rxu gdwd vhw1 < Wkh dgglwlrqdo vwuxfwxuh wkdw wkh Hxohu dssurdfk lpsrvhv lv riwhq uhmhfwhg e wkh gdwd1 Iru lqvwdqfh/ wkh dgmxvwphqw frvw ixqfwlrq lv xvxdoo lpsuhflvho hvwlpdwhg1 43 Zh hvwlpdwh htxdwlrq +6, xvlqj wzr glhuhqw hvwlpdwruv1 44 Iluvw/ zh xvh wkh ZLWKLQ hvwlpdwru1 Wkh ZLWKLQ hvwlpdwru dffrxqwv iru wkh {hg lqgxvwu hhfwv e xvlqj ohdvw vtxduhv rq wkh ghyldwlrqv ri doo yduldeohv wr wkhlu lqgxvwu phdqv +wkdw lv lpsolflwo lqfoxglqj lqgxvwu gxpplhv,1 Lq dgglwlrq/ zh dffrxqw iru wkh wlph hhfwv e h{solflwo lqfoxglqj d ixoo vhw ri hdu gxpplhv lq doo wkh uhjuhvvlrqv1 Wkh ZLWKLQ hvwlpdwru pd vxhu iurp wzr srvvleoh eldvhv1 Wkh uvw rqh lv gxh wr wkh suhvhqfh ri wkh odjjhg ghshqghqw yduldeoh1 45 Dv wklv eldv idoov dv wkh vdpsoh shulrg ohqjwkhqv/ lw lv olnho wr eh yhu vpdoo jlyhq wkh uhodwlyho orqj ohqjwk W ri rxu gdwd vhw1 Wkh vhfrqg eldv lv gxh wr wkh hqgr0 jhqhlw ri frqwhpsrudqhrxv vdohv jurzwk dqg fkdqjhv lq wkh xvhu frvw1 Wklv pd fdoo iru dq lqvwuxphqwdo yduldeoh hvwlpdwru1 Zh wkhuhiruh dovr suhvhqw uh0 vxowv zlwk wkh Ruwkrjrqdo Ghyldwlrqv +RG, hvwlpdwru ghyhorshg lq Duhoodqr dqg Eryhu +4<<8,1Wklv lv d JPP hvwlpdwru lq zklfk hdfk revhuydwlrq lv h{suhvvhg dv lwv ghyldwlrq iurp wkh dyhudjh ri ixwxuh revhuydwlrqv lq wkh vdpsoh iru wkh vdph lqgxvwu 1 Wkh ohyho yduldeohv odjjhg wzr dqg hduolhu fdq wkhq eh xvhg dv lqvwuxphqwv1 46 ; Qrwh wkdw zh xvh lqgxvwu khuh orrvho 1 Hdfk ri wkh 84 uhsuhvhqwdwlyh lqgxvwulhv kdv d {hg hhfw/ qrw rqo hdfk ri wkh 4: lqgxvwulhv1 < Zh fdq qrw iroorz Wrelq*v T dssurdfk ehfdxvh zh gr qrw kdyh wkh pdunhw ydoxh ri wkh upv lqfoxghg lq wkh djjuhjdwh edodqfh vkhhw lwhpv1 43 Wkh vwxglhv wkdw hvwlpdwh dq Hxohu htxdwlrq iru d sdqho ri upv zlwklq frxqwulhv ri wkh hxur duhd w slfdoo kdyh gl!fxowlhv lq rewdlqlqj d frqyh{ dgmxvwphqw frvw ixqfwlrq1 Vhh Prmrq +5333, iru d vxuyh 1 44 Iru d pruh wkrurxjk glvfxvvlrq ri wkh dgydqwdjhv dqg glvdgydqwdjhv ri wkh ydulrxv hv0 wlpdwruv lq wklv nlqg ri prgho/ vhh Kdoo hw do1 +4<<<,1 Doo hvwlpdwlrqv duh shuiruphg xvlqj GSG<; iru Jdxvv zulwwhq e P1 Duuhodqr dqg V1 Erqg1 45 Wklv eldv dulvhv ehfdxvh ri wkh fruuhodwlrq ri wkh odjjhg lqyhvwphqw fdslwdo udwlr zlwk wkh sdvw dqg fxuuhqw ydoxhv ri wkh lghrv qfudwlf glvwxuedqfhv1 Vhh Qlfnhoo +4<;4,1 46 Zh dovr h{shulphqwhg zlwk wkh Duhoodqr0Erqg uvw glhuhqfh0jpp hvwlpdwru1 Krzhyhu/ ECB Working Paper No 78 October

11 Lq rughu wr pdnh wkh olqn zlwk prqhwdu srolf / zh lqyhvwljdwh lq wkh vhf0 rqg vwhs wkh vhqvlwlylw ri wkh lqgxvwu vshflf +qrplqdo, lqwhuhvw rq ghew wr fkdqjhv lq vkruw dqg orqj0whup lqwhuhvw udwhv e hvwlpdwlqj wkh iroorzlqj uhjuhvvlrq= LG 3 4 l w 5 LG l>wã4 6 l wã4 +7, zkhuh l w lv wkh vkruw ru orqj0whup qrplqdo lqwhuhvw udwh dqg LG l>w lv wkh dyhudjh lqwhuhvw sdlg rq ghew e lqgxvwu l1 1 Wkh orqj0uxq hhfw ri d fkdqjh lq wkh lqwhuhvw udwh rq wkh dyhudjh lqwhuhvw udwh rq ghew lv jlyhq e Ilqdoo / lq rughu wr whvw zkhwkhu prqhwdu srolf kdv khwhurjhqrxv hhfwv dfurvv glhuhqw vl}h fodvvhv/ zh dovr lqwhudfw wkh xvhu frvw lq htxdwlrq +6, dqg wkh lqwhuhvw udwh lq htxdwlrq +7, zlwk vl}h gxpplhv1 Wkh k srwkhvlv wkdw vpdoohu upv duh vxemhfw wr juhdwhu lqirupdwlrqdo sureohpv dqg duh wkxv dhfwhg pruh vwurqjo e d prqhwdu srolf wljkwhqlqj fdq eh whvwhg lq rxu gdwd vhw1 Wkh elj dgydqwdjh ri wkh vl}h fulwhulrq lv wkdw lw fdq vdiho eh wuhdwhg dv h{rjhqrxv wr wkh edodqfh vkhhw ri wkh lqgxvwu / vr wkdw qr vlpxowdqhlw sureohpv dulvh1 D pruh gluhfw whvw ri wkh eurdg edodqfh vkhhw fkdqqho ri prqhwdu srolf zrxog eh wr dqdo vh zkhwkhu wkh lqwhuhvw udwh hhfwv duh vwurqjhu lq lqgxvwulhv zlwk zhdn edodqfh vkhhwv1 Krzhyhu/ prvw lqglfdwruv ri wkh vwuhqjwk ri wkh edodqfh vkhhw srvlwlrq vxfk dv wkh fryhudjh udwlr ru ohyhudjh zloo eh hqgrjhqrxvo ghwhuplqhg zlwk wkh dyhudjh lqwhuhvw udwh rq ghew1 6 Wkh gdwd 614 Wkh EDFK gdwdedvh Wkh EDFK0gdwdedvh iurp wkh Hxurshdq Frpplvvlrq frqwdlqv djjuhjdwhg hduo edodqfh vkhhw dqg surw dqg orvv dffrxqw lqirupdwlrq iru vhyhqwhhq glhuhqw vhf0 wruv dqg wkuhh vl}h fodvvhv ri upv1 Lw fryhuv hohyhq Hxurshdq frxqwulhv iru d shulrg iurp wkh hduo 4<;3v wr wkh plg04<<3v1 D xqlw ri revhuydwlrq/ lv ghqhg e frxqwu / vl}h dqg vhfwru1 Iru lqvwdqfh/ odujh Jhupdq upv lq wkh irrg/ gulqn dqg wredffr vhfwru lv rqh revhuydwlrqdo xqlw> vpdoo Iuhqfk upv lq wkh fkhpl0 fdo dqg pdq0pdgh ehuv lqgxvwu lv dqrwkhu1 Wkh qxpehu ri upv xvhg lq wkh djjuhjdwlrq xvxdoo glhuv iurp hdu wr hdu/ exw lq jhqhudo lw lv txlwh odujh1 Iru lqvwdqfh/ iru Jhupdq lw lv durxqg 4</333 upv hpsor lqj durxqg 6/833/333 hpsor hhv/ iru Lwdo lw lv durxqg 5:/333 upv hpsor lqj 5/9333/333 hpsor hhv1 Ehiruh wkh djjuhjdwlrq wdnhv sodfh/ wkh dffrxqwlqj gdwd duh kduprqlvhg dfurvv frxqwulhv lq d vlqjoh irupdw1 Wkhuhiruh/ hdfk lqgxvwu kdv rqh djjuhjdwhg edo0 wkh frh!flhqwv wxuqhg rxw wr eh yhu lpsuhflvho hvwlpdwhg1 Wklv zdv pdlqo gxh wr gl!fxowlhv lq qglqj jrrg lqvwuxphqwv iru wkh glhuhqfh lq wkh fkdqjh ri wkh xvhu frvw1 Zh dovr vxvshfw phdvxuhphqw huuru wr eh d sureohp lq wkh uvw glhuhqfh hvwlpdwru/ dv phdvxuhphqw huuru lv h{dfhuedwhg zkhq wdnlqj uvw glhuhqfhv udwkhu wkdq glhuhqfhv iurp phdqv1 ]loldn +4<<:, kdv dujxhg wkdw Ruwkrjrqdo Ghyldwlrqv pd rhu h!flhqf jdlqv ryhu uvw glhuhqfhv zkhq phdvxuhphqw huuru lv suhvhqw1 Wklv pd h{sodlq zk ruwkrjrqdo ghyldwlrqv zrunv ehwwhu lq rxu fdvh1 10 ECB Working Paper No 78 October 2001

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14 ^Lqvhuw Wdeoh 4` Wklv qglqj lv frquphg e wkh pruh irupdo uhjuhvvlrq uhvxowv uhsruwhg lq Wdeoh 51 Wkh uvw uhjuhvvlrq ri Wdeoh 5 vkrzv wkdw vpdoo upv sd vwdwlvwlfdoo dqg hfrqrplfdoo d vljqlfdqwo kljkhu dyhudjh lqwhuhvw rq wkhlu ghew wkdq odujh upv1 Hyhq lq Jhupdq / wkh frxqwu zlwk wkh vpdoohvw glhuhqfh ehwzhhq odujh dqg vpdoo upv/ wkh glhuhqfh lv vwloo :8 edvlv srlqwv1 Lq Lwdo / dovr phglxp vl}hg upv sd vljqlfdqwo pruh wkdq odujh upv1 Wkh vhfrqg uhjuhvvlrq uhsruwhg lq Wdeoh 5whvwv zkhwkhu wklv frxog eh gxh wr glhuhqfhv lq pdwxulw vwuxfwxuh1 Wkh uhvxowv vkrz wkdw hyhq dffrxqwlqj iru glhuhqfhv lq pdwxulw vwuxfwxuh/ vpdoo upv sd vljqlfdqwo pruh wkdq odujh upv1 Vrphzkdw vxusulvlqjo / d vkruwhu pdwxulw vwuxfwxuh lpsolhv d kljkhu dyhudjh lqwhuhvw udwh lq Lwdo dqg Vsdlq1 Wklv pd lqglfdwh wkdw upv zlwk d orz fuhglw vwdqglqj duh irufhg wr qdqfh sulpdulo wkurxjk vkruw0whup ghew dw kljk lqwhuhvw udwhv1 Wkh wklug uhjuhvvlrq whvwv zkhwkhu wkhuh duh glhuhqfhv lq wkh frvw ri ghew dfurvv vl}hv diwhu frqwuroolqj iru glhuhqfhv lq froodwhudo1 Djdlq/ wkh vpdoo up hhfw uhpdlqv1 Zh dovr qg/ iru Iudqfh dqg Vsdlq/ wkdw upv zlwk d kljkhu vkduh ri froodwhudolvdeoh dvvhwv rq dyhudjh sd ohvv rq wkhlu ghew1 Rqo zkhq frqwuroolqj mrlqwo iru froodwhudo dqg pdwxulw / wkh vpdoo up hhfw glvdsshduv lq Jhupdq 1 Ryhudoo/ wkhvh uhvxowv vxjjhvw wkdw vl}h kdv dq lqghshqghqw hhfw rq d up*v lqwhuhvw udwh dqg wkdw lw pd lqghhg eh xvhixo wr xvh vl}h dv dq lqglfdwru wr whvw iru fuhglw fkdqqho hhfwv1 ^Lqvhuw Wdeoh 5` Judskv 4 wr 7 jlyh dq lpsuhvvlrq ri wkh f folfdo ehkdylrxu ri wkh lqyhvwphqw0 fdslwdo udwlr/ vdohv jurzwk/ wkh xvhu frvw dqg wkh dyhudjh lqwhuhvw udwh rq ghew lq hdfk ri wkh irxu frxqwulhv1 Dowkrxjk wkhuh lv txlwh vrph furvv0lqgxvwu yduldwlrq/ wkhuh lv d fohdu f folfdo sdwwhuq lq wkh ryhudoo ehkdylrxu ri lqyhvwphqw dqg vdohv jurzwk1 Iru h{dpsoh/ lq hdfk ri wkh frxqwulhv wkh lqyhvwphqw fdslwdo udwlr ihoo lq wkh hduo 4<<3v dv wkh hfrqrp zhqw wkurxjk d uhfhvvlrq1 Rqh fdq dovr revhuyh wkdw wkh furvv lqgxvwu yduldwlrq lv kljkhu lq Lwdo dqg Vsdlq wkdq lq Jhupdq dqg Iudqfh1 Wkh wlph yduldwlrq lq wkh xvhu frvw lv ohvv surqrxqfhg1 Krzhyhu/ wkh hhfwv ri wkh HUP fulvlv lq wkh hduo 4<<3v lv hylghqw lq d ulvh ri wkh uhdo frvw ri ghew dqg rq wkh xvhu frvw lq wkdw shulrg lq Iudqfh/ Lwdo dqg Vsdlq1 7 Uhvxowv ^Lqvhuw Judskv 4 wr 7` 714 Wkh g qdplf qhrfodvvlfdo prgho Wdeoh 6 uhsruwv wkh uhjuhvvlrq uhvxowv ri wkh edvlf vshflfdwlrq +6, iru hdfk ri wkh irxu frxqwulhv1 Iru frpsohwhqhvv/ Wdeoh 6 dovr uhsruwv wkh uhjuhvvlrq uhvxowv zkhq zh srro wkh frxqwu gdwd1 53 Krzhyhu/ wkh k srwkhvlv wkdw doo wkh 53 Lq wklv fdvh/ wkh hvwlpdwhv duh fduulhg rxw zlwk frxqwu 0vshflf wlph gxpplhv1 ECB Working Paper No 78 October

15 sdudphwhuv ri wkh prgho duh htxdo dfurvv frxqwulhv lv vwurqjo uhmhfwhg +wkh S0 ydoxh ri wkh I whvw djdlqvw d vshflfdwlrq zlwk frxqwu vshflf frh!flhqwv lv ri wkh rughu ri 43H0;,1 Dv glvfxvvhg ehorz/ wklv dsshduv wr eh prvwo gxh wr wkh vljqlfdqw glhuhqfhv lq wkh sdudphwhuv fdswxulqj wkh vkruw uxq g qdplfv1 Wkh uvw sdqho uhsruwv wkh ZLWKLQ hvwlpdwhv dqg wkh vhfrqg sdqho wkh RG hvwlpdwhv1 Iru hdfk vhw ri hvwlpdwhv/ zh frpsxwh wkh orqj uxq hodvwlflwlhv ri fdslwdo zlwk uhvshfw wr vdohv dqg wr wkh xvhu frvw ri fdslwdo1 Wkh vwdqgdug huuru ri wkhvh hodvwlflwlhv lv ghulyhg zlwk wkh ghowd phwkrg1 D qxpehu ri lqwhuhvwlqj ihdwxuhv fdq eh revhuyhg1 54 Iluvw/ wkh orqj0uxq hodvwlflwlhv ri wkh uhdo fdslwdo vwrfn zlwk uhvshfw wr vdohv dqg wkh xvhu frvw gr qrw dsshdu wr eh vljqlfdqwo glhuhqw iurp rqh lq doo ri wkh frxqwulhv/ h{fhsw iru wkh RG hvwlpdwhv lq Jhupdq 1 Srrolqj wkh revhuydwlrq ri wkh irxu frxqwulhv/ zh rewdlq dq hodvwlflw ri 031<3 iru wkh xvhu0frvw dqg ri 31<; iru vdohv zlwk wkh ZLWKLQ dqg uhvshfwlyho dqg 31:; iru uhvshfwlyho wkh xvhu frvw dqg vdohv zlwk wkh RG1 Wkhvh hvwlpdwhv lqglfdwh wkdw d Free0Grxjodv vshflfdwlrq ri wkh surgxfwlrq ixqfwlrq lv qrw uhmhfwhg e wkh gdwd1 55 Dffruglqj wr rxu nqrzohgjh wklv lv wkh uvw vwxg wr vkrz d forvh wr xqlw xvhu frvw hodvwlflw ri fdslwdo rq wkh edvlv ri furvv0lqgxvwu yduldwlrqv lq wkh dyhudjh lqwhuhvw udwh rq ghew1 Dv phqwlrqhg lq wkh lqwurgxfwlrq wklv qglqj lv frqvlvwhqw zlwk wkh olwhudwxuh zklfk kdv lghqwlhg fkdqjhv lq wkh xvhu frvw ri fdslwdo edvhg rq wd{ udwhv +Kdvvhw dqg Kxeedug/ 4<<:,1 Rxu hvwlpdwhv duh forvh wr wkh xsshu erxqg iru wkh hhfw ri xvhu frvw dv irxqg e wklv rwkhu olwhudwxuh1 Lw lv dovr frqvlvwhqw zlwk wkh qglqjv ri Fdedoohur hw do1 +4<<8,/ zklfk xvhv wlph vhulhv hfrqrphwulfv rq klvwrulfdo gdwd1 ^lqvhuw Wdeoh 6` Vhfrqg/ lq doo frxqwulhv wkh frh!flhqw 9 / zklfk fdswxuhv wkh dgmxvwphqw wr0 zdugv wkh orqj uxq ghvluhg fdslwdo vwrfn lv qhjdwlyh dqg vljqlfdqw1 Wklv ixuwkhu frqupvwkdwdqhuurufruuhfwlrqphfkdqlvp/riwkhnlqgsursrvhge Erqghw do1 +4<<:, dqg Kdoo hw do1 +4<<<, lv dssursuldwh wr prgho lqyhvwphqw ghpdqg lq hdfk ri wkh irxu frxqwulhv zh orrn dw1 Qrwlfh wkdw wkh vshhg ri dgmxvwphqw lv kljkhvw lq Jhupdq 1 Krzhyhu/ li zh hvwlpdwh wkh prgho iru Iudqfh/ Lwdo dqg Vsdlq ryhu wkh vdph vdpsoh dv Jhupdq / wkhvh glhuhqfhv duh vrphzkdw uhgxfhg1 Wklug/ dowkrxjk wkh vkruw0uxq hhfwv ri wkh xvhu frvw dqg ri vdohv duh do0 zd v vljqlfdqw/ wkhlu pdjqlwxgh duh/ lq frqwudvw wr wkh orqj0uxq hhfwv/ txlwh glhuhqw dfurvv frxqwulhv1 Orrnlqj dw wkh RG hvwlpdwhv/ wkh vxp ri vkruw0uxq frh!flhqwv rq fkdqjhv lq wkh xvhu frvw udqjh iurp lq Lwdo wr 0319< lq Vsdlq dqg wkh vxp rq wkh frh!flhqwv dvvrfldwhg wr wkh jurzwk ri vdohv udqjh iurp 317; lq Vsdlq wr 31;6 lq Iudqfh1 Rqh vkrxog/ krzhyhu/ eh fduhixo derxw lqwhusuhwlqj 54 Wr fkhfn urexvwqhvv zh dovr hvwlpdwhg wkh edvlf vshflfdwlrq +6, iru Iudqfh/ Lwdo dqg Vsdlq ryhu wkh vdph vdpsoh dv Jhupdq 1 Ryhudoo/ wkh uhvxowv kljkoljkwhg ehorz frqwlqxh wr krog1 Wkhvh uhvxowv duh dydlodeoh xsrq uhtxhvw1 55 Wklv uhvxow lv urexvw wr yduldwlrqv lq wkh ghqlwlrq ri wkh xvhu frvw ri fdslwdo1 Iru lqvwdqfh/ wkh uhvxow dovr krogv zkhq ghqlqj wkh lqwhuhvw udwh sduw ri wkh xvhu frvw dv htxdo wr wkh orqj whup erqg udwh ru dv htxdo wr wkh up vshflf lqwhuhvw udwh rq ghew1 14 ECB Working Paper No 78 October 2001

16 wkhvh glhuhqfhv dfurvv frxqwulhv dv vwuxfwxudo glhuhqfhv1 Lw lv dovr qrwhzruwk wkdw dowkrxjk wkh txdolwdwlyh uhvxowv duh yhu vlplodu/ wkh ZLWKLQ hvwlpdwhv ri wkh vkruw0uxq frh!flhqwv vxhu iurp d grzqzdug eldv zklfk lv prvw vhyhuh lq Iudqfh dqg lq Lwdo 1 Wklv pd lqghhg eh gxh wr wkh hqgrjhqhlw sureohp1 715 Wkh dyhudjh lqwhuhvw udwh rq ghew dqg prqhwdu srolf Lq wklv Vhfwlrq/ zh uhsruw wkh uhvxowv ri hvwlpdwlqj htxdwlrq +7, zklfk olqnv wkh dyhudjh lqwhuhvw udwh rq ghew wr wkh vkruw dqg orqj0whup lqwhuhvw udwh1 Wkh edvh uhjuhvvlrqv +wkh uvw dqg wklug sdqho lq Wdeoh 7, vkrz wkdw wkh dyhudjh lqwhuhvw udwh sdlg e upv uhvsrqgv srvlwlyho dqg txlwh vwurqjo wr lqwhuhvw udwh fkdqjhv1 Wkh orqj0uxq sdvv0wkurxjk ri wkh vkruw0whup lqwhuhvw udwh + 5, lv orzhvw lq Jhupdq dqg Iudqfh +derxw 3193, dqg kljkhvw lq Lwdo +4169, zlwk Vsdlq wdnlqj dq lqwhuphgldwh srvlwlrq1 Wklv pd lq sduw eh d uhvxow ri wkh orqjhu pdwxulw vwuxfwxuh ri upv* ghew lq wkh iruphu frxqwulhv1 Lqghhg/ wkh wklug sdqho ri Wdeoh 7 vkrzv wkdw wkh sdvv0wkurxjk ri wkh orqj0whup lqwhuhvw udwh lv kljkhu lq Jhupdq dqg Iudqfh wkdq lq wkh rwkhu frxqwulhv1 ^lqvhuw Wdeoh 7` Dffruglqj wr wkh wkhru ri wkh qdqfldo dffhohudwru +Ehuqdqnh/ Jhuwohu dqg Jlofkulvw/ 4<<<,/ wkh lqwhuhvw sdlg e upv zlwk zhdn edodqfh vkhhwv vkrxog uhdfw pruh wr prqhwdu srolf vkrfnv wkhq wkh lqwhuhvw sdlg e upv zlwk vwurqj edodqfh vkhhwv1 Vlqfh wkh vwuhqjwk ri wkh edodqfh vkhhw lv hqgrjhqrxv/ zh xvh vl}h gxpp yduldeohv wr whvw li wkh dyhudjh lqwhuhvw sdlg e vpdoo upv uhvsrqgv pruh wr lqwhuhvw udwh fkdqjhv +Vhh wkh vhfrqg dqg irxuwk sdqho ri Wdeoh 7,1 Ryhudoo/ zh gr qrw qg frpshoolqj hylghqfh wkdw wkh lqwhuhvw udwh frvw ri vpdoo upv uhdfwv vwurqjhu wkdq wkdw ri phglxp ru odujh vl}hg upv1 716 Vl}h dqg wkh hhfw ri wkh xvhu frvw rq lqyhvwphqw Wkh vl}h ri upv lv riwhq xvhg dv d fulwhulrq wr glvwlqjxlvk ehwzhhq wkrvh upv wkdw duh oltxlglw frqvwudlqhg dqg wkrvh wkdw duh qrw1 Exw rqo d shuihfw phdvxuh ri wkh xvhu frvw ri fdslwdo zrxog fdswxuh wkh hhfwv ri vxfk oltxlglw frqvwudlqwv e d kljkhu xvhu frvw ri fdslwdo1 Ehfdxvh rxu phdvxuh lv edvhg rq wkh dyhudjh lqwhuhvw udwh sdlg rq ghew udwkhu wkdq rq wkh pdujlqdo lqwhuhvw udwh dqg ehfdxvh wkhlu pd eh dq xqrevhuyhg vkdgrz frvw dvvrfldwhg zlwk vpdoo upv/ lw lv zruwk dqdo vlqj zkhwkhu wkh vhqvlwlylw ri lqyhvwphqw zlwk uhvshfw wr wkh xvhu frvw ghshqgv rq wkh vl}h ri wkh upv1 Diwhu kdylqj vkrzq wkdw wkh lqwhuhvw udwh frpsrqhqw ri wkh xvhu frvw lv fruuhodwhg wr prqhwdu srolf / zh whvw zkhwkhu wkh hhfwv ri wkh xvhu frvw rq lqyhvwphqw ghshqg rq wkh vl}h ri wkh up1 Li wkh qdqfldo dffhohudwru pdwwhuv iru wkh wudqvplvvlrq ri prqhwdu srolf / fkdqjhv lq wkh ohyho ri lqwhuhvw udwh vkrxog lpso fkdqjhv lq wkh h{whuqdo qdqfldo suhplxp1 Wkh xvhu frvw vkrxog kdyh d vpdoohu hhfwv rq odujh upv iru zklfk wkh h{whuqdo qdqfh suhplxp vkrxog eh ohvv vhyhuh1 Zh lqwhudfw wkh vkruw0uxq hhfwv ri wkh ECB Working Paper No 78 October

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23 Table 2: Determinants of the cost of debt Germany France Italy Spain Coefficient Std. Error Coefficient Std. Error Coefficient Std. Error Coefficient Std. Error CONST Small Medium CONST Small Medium SD i CONST na na Small na na Medium na na BK i na na CONST na na Small na na Medium na na BK i na na SD i na na Source: Authors calculation. The dependent variable is the firms mean over time of the ratio of interest payment on total debt (ID i ). It is regressed on a constant, and, successively, on dummy variables for size classes(small and Medium ), firms mean over time of short-termdebt on total debt (SD i ), and the firms mean over time of collateralizable assets (BK i ) (land and buildings as a fraction of total fixed assets). 22 ECB Working Paper No 78 October 2001