Introduction

This chapter takes acloser look at the monetary transmission mechanism in Germany, focusing on investment demand. For a more detailed econometric analysis with further results see von Kalckreuth (2001) as well as Deutsche Bundesbank (2002b) and von Kalckreuth (2002). The aim of this chapter is to look at the interest channel and the balance sheet channel in Germany separately and to compare their relative strength. We follow the methodology introduced in Chatelain et al. (chapter 7 in this volume). The interest channel is evaluated on the basis of the estimated long-run user cost elasticity of capital demand, whereas the broad credit channel hypothesis is tested by comparing cash-flow sensitivities of financially constrained and unconstrained firms. This chapter has two distinct features. First, we employ a very direct and reliable measure for financial constraints: creditworthy and not creditworthy firms are distinguished using rating data generated by the Deutsche Bundesbank in order to judge the quality of trade bills. Chatelain and Tiomo (chapter 10 in this volume) use a similar methodology in a study of French firm investment.

The second important feature of this chapter is that it uses theoretical user costs of capital constructed according to King and Fullerton (1984), under the assumption that the neo-classical model is true and that everybody has equal access to the financial markets. This reflects the pure price effects more accurately than a user cost variable relying on apparent interest rates, i.e. the ratio of interest paid to total debt.