Is the Interest Rate Channel still working? Post-Crisis Evidence from German SMEs

Using a unique dataset from German small and medium-sized enterprises (SMEs), we test whether pessimistic business expectations have impeded the functioning of the interest rate channel during the post-crisis period. We estimate firms’ user cost elasticity of capital for the period 2008–2015, and test whether this elasticity differs for firms that hold pessimistic business expectations compared with those that hold positive expectations. Our results show that SMEs have significantly responded to changes in the user cost of capital during the post-crisis period. However, the results are mainly driven by SMEs that hold positive business expectations. Firms having neutral or negative expectations depict a much smaller user cost elasticity, which is not statistically different from zero. Our results reveal the limitations of an expansionary monetary policy and confirm the important role that expectations play for firms’ investment decisions.

Effectiveness of Fiscal Incentives for R&D: Quasi-experimental Evidence

We exploit a 2008 UK policy reform that increased the tax incentives for R&D in medium-sized enterprises relative to large ones, to overcome the endogeneity of exposure to such tax credits. We estimate a difference-in-difference design on the universe of corporation tax filings in the United Kingdom, combined with other datasets. We find a positive and significant impact of tax credits for R&D, implying a user-cost elasticity estimate of around −1.6. This magnitude implies around $1 in additional private R&D spending per dollar foregone in tax revenue. (JEL H25, H32, K34, L25, O32)