The impact of monetary policy on european corporate investments

Abstract

This thesis investigates the effects of monetary policy on corporate investment decisions in major European economies 4 Germany, France, Italy, Spain, and the Netherlands 4 during the period 2002 to 2023. By leveraging quarterly panel data from publicly listed firms and employing a Local Projections Instrumental Variables (LP-IV) methodology, the analysis identifies how firm-specific characteristics such as age and dividend payment status mediate the impact of monetary shocks. The monetary policy shocks are derived from high-frequency changes in the 1-year Overnight Index Swap (OIS) rate around European Central Bank (ECB) policy announcements, serving as an exogenous measure of interest rate movements. The analysis uses the 1-year EURIBOR rate as a proxy for the interest rate set by the European Central Bank, thereby capturing medium-term monetary conditions that reflect both current policy stance and market expectations. The findings reveal substantial heterogeneity in firm responses. Younger, non-dividend-paying firms exhibit pronounced reductions in investment levels, driven by higher sensitivity to borrowing constraints, collateral devaluation, and earnings instability under tighter monetary conditions. In contrast, older, dividend-paying firms demonstrate resilience, with minimal changes in investment behavior due to their robust financial structures and diversified financing options. Among the examined transmission mechanisms, the cost channel emerges as the dominant driver of investment heterogeneity, highlighting the critical role of operational costs and earnings dynamics. Demand-side factors, while secondary, exhibit heightened volatility for younger firms, though their contribution to investment adjustments is less pronounced.

Date of Award	6 Feb 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)