DRAFT FOR COMMENTS Corporate investment and European monetary policy

This paper assesses the different structures of investment finance in the main EMU member economies, using the BACH database of balance sheet data, aggregated by firm size. Two main sets of results are obtained. First, each country/size class group is characterised using the net sources and uses of finance methodology. The importance of long-term debt as a source of investment finance, and its reduction in the later part of the 1990s, is emphasised. The second contribution of the paper is to conduct panel regressions examining the determinants of the level and returns to investment, paying particular attention to the differential impact of economic conditions and monetary policy. The main findings to emerge are that the level of small firms’ investments are particularly dependent on the share of long-term debt in their financing and on monetary policy conditions, and that compared to larger firms their growth is more strongly associated with investment. The broad conclusion is that while stability should remain a central macroeconomic goal, financial market policy aimed at encouraging the expansion of a stable supply of long-term credit is also critical for the employment and growth prospects of the eurozone. 1 Supernumerary Fellow in Economics, St Anne’s College, University of Oxford. Contact address: Finance and Trade Policy Research Centre, 21 St Giles, Oxford OX1 3LA; [email protected]. I am grateful to Valpy FitzGerald, Richard Mash and participants at the EIFC workshop at Warwick Business School (February 2004) for comments.