How does monetary policy affect investment in the euro area?

Elena Durante, Annalisa Ferrando and Philip Vermeulen

Research Bulletin, 2020, vol. 77

Abstract: We set out to analyse the monetary policy transmission mechanism by documenting how the annual investment of more than one million firms in Germany, Spain, France and Italy responded to monetary policy shocks between 2000 and 2016. We show that euro area firms react differently depending on their age and the industry they operate in: young firms and those producing durable goods react more strongly than the average firm. This confirms that monetary policy is affecting firms’ investment through two different channels. On the one hand, the “interest rate channel” affects demand for durable goods more than demand for services, which in turn affects investment demand from the producers of those goods. On the other hand, as young firms are more likely to face financing constraints, their stronger than average reaction can be explained by the “balance sheet channel” of monetary policy transmission. JEL Classification: E22, E52

Keywords: Investment; Monetary policy (search for similar items in EconPapers)
Date: 2020-11
Note: 235236
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Citations: View citations in EconPapers (1)

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