Assessing the Effects of Monetary Policy on the Working Capital in Iranian Firms

Articles in Press

Document Type : Research Paper

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Assistant Professor, Monetary and banking research institute

Abstract

The most important monetary transmission mechanism affecting the economy from the supply side is the working capital channel. This study explores the operational effectiveness of the working capital channel in Iran's money market with financial repression, where bank interest rates are set administratively and are often lower than inflation. Utilizing annual data from 356 Iranian listed companies from 2004 to 2023, the paper employs the dynamic panel GMM estimation method to investigate the impact of monetary variables—specifically bank interest rates and liquidity growth—on firms’ working capital. The results indicate that the bank interest rate has a negative and significant effect on firms’ working capital ratio, while liquidity growth does not have a significant impact. Moreover, when disaggregating the ratio of operational working capital into the inventory ratio and the trade credit ratio, the findings reveal that the bank interest rate adversely affects the total operational working capital ratio only through the trade credit ratio. Additionally, the study confirms firm-level heterogeneity in the effect of the bank interest, with stronger effects in smaller and highly leveraged firms. Notably, changes in bank interest rates don’t significantly impact the working capital of import-dependent firms.

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Quarterly Journal of Applied Theories of Economics

Articles in Press, Accepted Manuscript
Available Online from 19 August 2025

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