Monetary Policy and Corporate Investment in France

Using a large panel of 6946 French manufacturing firms, this paper investigates the effect of sales, of the cost of capital and of liquidity constraint variables (cash flow or cash stock) on the stock of capital from 1990 to 1999. The user cost elasticity is at the most 0.26 in absolute terms for all the firms of the sample. Three groups of firms representing around 20 per cent of the sample (firms facing a high risk of bankruptcy, firms belonging to the capital goods sector, firms making extensive use of trade credit) are more sensitive to cash flow. Risky firms are less sensitive to sales, when cash stock replaces cash flow. Simulations following shocks of interest rate (related to monetary policy shocks), provides short run contemporaneous elasticities of investment with respect to interest rate through the user cost and through debt repayments taken into account in cash flow.