An Investigation on the Balance-Sheet Channel in Monetary Transmission Mechanism with Emphasis on the Role of Firms (Case Study of Iran)

Document Type : Research Paper

Authors

1 PhD. Candidate in Economics, University of Tabriz

2 Professor of Economics, University of Tabriz

Abstract

The balance-sheet channel was introduced after the big financial crises of 2008 and following the inability of the previous channels of monetary transmission mechanism to respond to the economic events. This channel similar to the bank lending channel can be categorized as one of the credit channels and based on the assumption of the inefficient and imperfect markets according to the asymmetric information. This channel sheds light on the important role of the firms in the transmission of monetary policy to the real economic variables. The financial statements of fifty nonfinancial firms from 2007 up to 2014 are studied by using the GMM method. In brief, the results indicate the negative and significant effect of the net worth of the firms and the interaction variable of monetary policy and the interest coverage ratio of the firms on the received loans. Therefore the effect of the monetary policy is boosted through the interest coverage ratio. Other findings relative to the macro and external organization factors, indicate the positive impact of the gross domestic product and price index on the received loans.

Keywords

Main Subjects


  1. Arnold, J. M., Clemens, J. M. K., & Raabe, K. (2006). Industries & the bank lending effects of bank credit demand & monetary policy in Germany. Discussion paper series1: Economic studies, 48,Deutsche Bundesbank, Research centre.
  2. Chatelain, J. B., Ehrmann, M., Generale, A., Martínez-Pp, J., Vermeulen, P., & Worms, A. (2003). Monetary policy transmission in the Euro Area: New evidence from micro data on firms & banks. Journal of the European Economic Association, MIT Press, 1(2-3), 731-742.
  3. Dargahi, H. & Hadian, M. (2016). Evaluation of fiscal and monetary shocks with emphasis on the interactions of banking system balance sheet and the real sector of Iran's economy: A DSGE approach. Journal of Applied Theories of economics, 3(1), 1-28 (In persion).
  4. Gilchrist, S., Bernanke, B.S., & Gertler, M. (1994). The financial accelerator and the flight to quality. Finance and Economics Discussion Series, 94-18, Board of governors of the Federal Reserve System (U.S.).
  5. Guariglia, A., & Mateut, S. (2006(. Credit channel, trade credit channel, and inventory investment: Evidence from a panel of UK firms. Journal of Banking & Finance, Elsevier, 30(10), 2835-2856.
  6. Haghighat, J., & Salahesh, T. (2016). The role of money multiplier in monetary transmission mechanism in Iran (bank lending and money supply). International Journal of Monetary Economics and Finance, 9(2), 212-223.
  7. Khoshnood, Z., & Esfandiari, M. (2014). Bank lending and capital adequacy: A comparison between public and private banks in Iran. Journal of Monetary and Banking research, 7(20), 211-235 (In persion).
  8. Mishkin, F.S. (2013). The economics of money, banking and financial markets. Global edtion, tenth edition, Pearson Education, 662-700.
  9. Oliner, S. D., & Rudebusch, G.D. (1996). Is there a broad credit channel for monetary policy?.  Journal of Economic Review, Federal reserve bank of San Francisco, 3-13.
  10. Ozlu, P., & Yalcin, C. (2010). The trade credit channel of monetary policy transmission: Evidence from non-financial firms in Turkey, Working Papers 1016, Research and Monetary Policy Department, Central bank of the Republic of Turkey.
  11. Palley, T. I. (2001). Endogenous money: What it is and why it matters. Public Policy Department, N.W. Washington DC, 1-34.
  12. Ruslan, A., Dana, H., & Ivana, K. (2015). The impact of monetary policy on financing of Czech firms.  Journal of Economics and Finance, Charles University Prague, Faculty of social sciences, 65(6), 455-476.
  13. Shabbir, S. (2012). Balance sheet channel of monetary policy and economic growth under fiscal dominance: Evidence from Pakistan. MPRA Paper, 41496 (22), 1-27.
  14. Shabbir, S. (2012). Balance sheet channel of monetary transmission in Pakistan: An empirical investigation. SBP Research Bulletin, 8(1), 1-12.
  15. Uluc, A., & Ralf, H. (2011). Identifying the balance sheet and lending channels of monetary transmission: A loan-level analysis, Working Papers 2011-01, University of Central Florida, Department of Economics, 1-32.
  16. Wesche, K. (2000). Is there a credit channel in Austria? The impact of monetary policy on firms' investment decisions, Working Papers 41, Oesterreichische Nationalbank (Austrian Central Bank), 1-36.
  17. Zaderey, N. (2003). Monetary transmission in Ukraine: Is there a broad credit channel, National university of Kyiv-Mohyla Academy, Economics education and research consortium, Master's program in Economics, 170-185.
  18. Zhi-Xin, L., & Xin, P. (2012). The balance sheet channel of monetary policy transmission: Evidence from Chinese listed companies, Third Global Congress on Intelligent Systems, 360-365.
  19. Zulkefly, A. K., Ngah, W., Saini, W. A., & Bakri, A.K. (2010). Bank lending channel of monetary policy: dynamic panel data evidence from Malaysia, MPRA Paper 26157, University Library of Munich, Germany, 1-22.