Does the credit channel work in Europe? A study based on the heterogeneity of investment behaviours from aggregated balance-sheet data

This article studies the impact of monetary policy on real economy in Europe through a particular transmission mechanism: the credit channel. The credit channel is based on the existence of information asymmetries in financial markets that change the agents financing conditions. According to the credit channel theory, investment elasticity to cash flow should increase following tight monetary periods, especially in small firms. We test this prediction of the credit channel by estimating a classical investment model (accelerator-profit) on a pseudo-panel database harmonised among European countries by the European Commission (BACH database). This data set includes firms balance sheet aggregated by industry and size in many European countries (Germany, France, Italy, Spain, Netherlands, Belgium, Austria and Portugal). Our results show that investment sensitivity to financing conditions is consistent with the credit channel theory and that this transmission channel of monetary chocks is a source of asymmetry in Europe between countries and between firms of different sizes.