Main Article Content

Abstract

Purpose - This study investigates the relevance of the balance sheet channel of monetary policy transmission concerning non-financial firms at the Pakistan Stock Exchange (PSX), a firm-level data.

Methods - This paper estimates a family of panel data regression models and constructs a dummy variable for monetary policy tightness.

Findings - The result indicates a positive relationship between cash flows and investment during periods of monetary tightness. The impact on cash flows is visibly more pronounced than that of the quantitative effect of an increase in capital cost, which gives rise to a balance sheet channel. Three financial constraints, namely size, leverage, and dividend policy, are used to segregate firms into financially constrained and unconstrained firms.

Implication - The results highlight the balance sheet channel impact on smaller firms' cash. The cash flows of highly leveraged firms were impacted more during the tight monetary policy periods and thereby were more prone to decline in investments. Results on constraints of dividend policy are, however, inconclusive.

Originality - The paper contributes to the literature by investigating the relevance of the balance sheet channel of monetary policy transmission concerning non-financial firms using firm-level data. It also contributes to the literature by constructing a dummy variable to measure monetary policy tightness.

Keywords

Monetary policy transmission monetary tightness constrained firms' investments

Article Details

Author Biographies

Amir Rafique, COMSATS University Islamabad, Islamabad, Pakistan

ASsistant Professor, Department of Management sciences

Muhammad Umer Quddoos, Bahaudddin Zakariya University, Multan, Pakistan

Assistant Professor, Department of Commerce

Shujat Ali, COMSATS University Islamabad, Islamabad, Pakistan

Department of Management Sciences, COMSATS University Islamabad, Pakistan

 

Faheem Aslam, COMSATS University Islamabad, Islamabad, Pakistan

Assistant Professor

Department of Management Sciences, 

Muneeb Ahmad, Jiangxi University of Finance and Economics, Nanchang, China

Ph.D Scholar, School of Finance

Jiangxi University of Finance and Economics, Nanchang, China

 

How to Cite
Rafique, A., Quddoos, M. U., Ali, S., Aslam, F., & Ahmad, M. (2021). Monetary policy transmission: Balance sheet channel and investment behavior of firms in Pakistan. Economic Journal of Emerging Markets, 13(1), 1–12. https://doi.org/10.20885/ejem.vol13.iss1.art1

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