A Vectorautoregressive Investment Model (VIM) and Monetary Policy Transmission: Panel Evidence from German Firms

This paper proposes a new framework for studying the effects of monetary policy on business investment, modeling investment spending as a VAR. Based on a panel of financial statement data for 6,408 German firms (44,345 datapoints) supplemented with user costs of capital and confidential measures of creditworthiness, we generate GMM estimates of a Vectorautoregressive Investment Model (VIM) containing investment, cash flow, sales, and the user cost of capital. Apart from reporting several substantive findings, this paper demonstrates that the panel VAR approach is useful for modeling firm dynamics and real/financial interactions and for assessing monetary policy transmission.