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The corporate investment channel of monetary policy in Denmark
An important monetary transmission channel works through the impact of interest rate changes on non-financial firms’ investment decisions. Higher monetary policy rates affect firms’ investment decisions by raising the costs of external financing and lowering aggregate demand for goods and services. Using 20 years of firm-level data from Denmark, we find that an increase in monetary policy rates is associated with a reduction in corporate investment, particularly by smaller firms.
Key messages
Why is this important?
Danmarks Nationalbank is the monetary policy authority in Denmark responsible for setting the monetary policy rates. In line with Denmark's fixed exchange rate policy, Danmarks Nationalbank maintains a fixed exchange rate of the krone against the euro. An important part of the transmission of monetary policy to the real economy is the impact on firms’ investment. Higher monetary policy rates affect firms’ investment decisions by raising the costs of external financing and lowering aggregate demand for goods and services. A thorough understanding of the monetary transmission is important in order to assess the current macroeconomic situation and to formulate economic policy recommendations.
Main chart
Investment declines with a lag in response to an unanticipated increase in monetary policy rates
Note:
Estimated average change in investment rate from year -1 to year t as response to a 100 basis points increase in monetary policy rates. The chart shows the point estimate as well as 95 percent confidence bands.
Source:
Own calculations based on data from Statistics Denmark, Danmarks Nationalbank, and Jarociński and Karadi (2020).