Monthly Bulletin April 2008 - European Central Bank - Europa

of fixed capital investment, but also to carry
out mergers and acquisitions. In this period
firms’ indebtedness – relative to their gross
operating surpluses – rose rapidly. Thereafter,
and especially in 2002, corporate balance
sheet restructuring, including a reduction in
debt in many sectors, probably contributed to
dampening fixed capital investment. Since early
2005 the growth rate of both debt and investment
have accelerated (see Chart 7).
The dampening effect that indebtedness may
have on investment may be better captured at the
firm level. Firm-level data indicate that highly
leveraged firms have the lowest investment
rates, which may point towards a negative
relationship between leverage and investment
Chart 7 Gross indebtedness, debt flows and
investment of non-financial corporations
(annual percentage changes; percentages)
16
12
8
4
0
-4
growth in non-financial corporations’ gross fixed
capital formation (left-hand scale)
growth in debt (left-hand scale)
debt to gross operating surplus (right-hand scale)
355
330
305
280
2000 2001 2002 2003 2004 2005 2006 2007
Source: ECB computation based on euro area integrated accounts.
Note: The latest data refer to the third quarter of 2007.
ARTICLES
Business investment in
the euro area and the role
of firms’ financial positions
Box 1
QUANTIFYING THE IMPACT OF FINANCIAL FACTORS ON INVESTMENT USING A MACROECONOMIC
APPROACH
This box considers in detail whether a study of financial factors may improve the understanding
of investment dynamics. An equation for non-construction investment is estimated and used as
the basis for a contribution analysis.
A standard specification of the production function is used to derive an equation in which
investment is a function of economic activity and the real cost of capital. In this approach, the
desired level of capital stock is related to the level of output and (expected) relative factor prices,
and firms choose an investment level that allows the capital stock to converge to its desired
level. In the long run, the capital-to-output ratio remains stable and, hence, the investment flow
is such that it not only covers the depreciation of the capital stock but also ensures that it grows
at the same rate as the trend increase in output. 1 Accordingly, investment dynamics depend on an
error correction term, which is based on the co-integrating (or long-run equilibrium) relationship
between investment and overall economic activity. In addition to the error correction term, the
equation incorporates as explanatory variables demand factors (proxied by the growth of real GDP
excluding investment), a measure of the cost of capital (which takes into account both the cost of
equity and the cost of lending) and the financing gap. The following reduced form is estimated:
⎛
⎝
⎞
⎠
FG t−1
FG t−5
1 For a discussion of the standard approach to model investment, see Baumann, U. and S. Price (2007), “Understanding investment better:
insights from recent research”, Bank of England Quarterly Bulletin. For an estimation at the euro area level, see Fagan, G., J. Henry
and R. Mestre (2001), “An area-wide model for the euro area”, ECB Working Paper No 42.
ECB
Monthly Bulletin
April 2008
63