The balance sheet channel of monetary policy

the panel evidence of Egypt

Research output: Contribution to journalArticle

Abstract

This paper examines the effects of monetary policy on firms’ investments in Egypt using disaggregated data and generalized method of moments (GMM) technique. It develops the neoclassical investment model by adding the interaction between user cost of capital and cash flow (CF). Therefore, monetary policy affects investment through three effects: user cost of capital, CF and interaction between them. Using a sample of 124 firms, the empirical finding supports the relevance of balance sheet channel (BSC) and the heterogeneous effect of monetary policy on investment. This finding signals that monetary authority should take cognizance of the stability of interest rate to stabilize firm-level investment.

Original languageEnglish
Pages (from-to)1-20
Number of pages20
JournalMacroeconomics and Finance in Emerging Market Economies
DOIs
Publication statusAccepted/In press - 24 Nov 2016

Fingerprint

Egypt
Monetary policy
Balance sheet
Cash flow
Interaction
User cost of capital
Generalized method of moments
Authority
Firm investment
Capital flows
Interest rates

Keywords

  • balance sheet channel
  • GMM
  • Monetary Policy

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

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abstract = "This paper examines the effects of monetary policy on firms’ investments in Egypt using disaggregated data and generalized method of moments (GMM) technique. It develops the neoclassical investment model by adding the interaction between user cost of capital and cash flow (CF). Therefore, monetary policy affects investment through three effects: user cost of capital, CF and interaction between them. Using a sample of 124 firms, the empirical finding supports the relevance of balance sheet channel (BSC) and the heterogeneous effect of monetary policy on investment. This finding signals that monetary authority should take cognizance of the stability of interest rate to stabilize firm-level investment.",
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author = "Shokr, {Mohamed Aseel} and {Abdul Karim}, Zulkefly and Zaidi, {Mohd Azlan Shah}",
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AB - This paper examines the effects of monetary policy on firms’ investments in Egypt using disaggregated data and generalized method of moments (GMM) technique. It develops the neoclassical investment model by adding the interaction between user cost of capital and cash flow (CF). Therefore, monetary policy affects investment through three effects: user cost of capital, CF and interaction between them. Using a sample of 124 firms, the empirical finding supports the relevance of balance sheet channel (BSC) and the heterogeneous effect of monetary policy on investment. This finding signals that monetary authority should take cognizance of the stability of interest rate to stabilize firm-level investment.

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