Monetary Policy Transmission in the Euro Area

Introduction

This chapter presents empirical results of the monetary policy transmission process for Luxembourg based on firm-level data. It is the first empirical analysis of this kind for Luxembourg. We investigate whether Luxembourg firms' investment is sensitive to the user cost of capital, to what extent the user cost is affected by changes in the monetary policy indicator and whether the broad credit channel is relevant in Luxembourg.

Following the approach presented in Chatelain et al. (chapter 7 in this volume), we estimate a sales accelerator model of investment. These estimates permit us to analyse the effects of monetary policy on firms' investment decisions through the user cost of capital. In addition, we investigate whether firms' investment behaviour is significantly affected by the strength of their balance sheets, as indicated by the cash level–capital ratio. In order to analyse the presence of differential effects between firms, we examine the role of other firm-specific characteristics, such as age.

A brief account of some Luxembourg peculiarities

Luxembourg is one of the original member states of the European Community (EC) and, with an estimated population of approximately 440,000 people and a share of around 0.3 per cent in euro area GDP, the smallest economy in today's European Union. The average annual growth of real GDP was around 5.4 per cent between 1990 and 2000. The rapid expansion of the Luxembourg economy owes much to the developments in the financial sector, which started in the early 1980s.