The macroeconomic evidence in Part 1 suggests that an important part of the output adjustments that are induced by monetary policy are ultimately due to changes in investment. The chapters in this section of book use firm level data to better understand the investment dynamics. A survey paper by J. B. Chatelain, A. Generale, I. Hernando, P. Vermeulen and U. von Kalckreuth is followed by country specific analyses focused on Belgium, Germany, France, Italy, Luxembourg and Austria.

The motivation for using firm-level data is two fold. First, using micro data may make it possible to side step some of the problems associated with studies that rely on aggregate data. Specifically, the simultaneity problem that plagues macroeconomic studies of investment is of particular concern for inferences regarding monetary transmission. Since short term interest rates tend to move counter-cyclically, there will be a natural tendency for interest rate changes to appear to have limited effects on investment. It is extremely difficult to find any econometric instruments that could be used to solve this problem.

The studies in this project largely identify the link between investment and the user cost of capital off of cross-firm variation in the user cost, much which of which is due to tax differences and other sources of asymmetry in firm-specific interest rates. These differences give rise to exogenous cross-firm variation that can be exploited in the estimation. Moreover, other firm-level instruments are often available for the endogenous components of the user cost.