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The impact of monetary policy stance, financial conditions, and the GFC on investment-cash flow sensitivity

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  • Gül, Selçuk
  • Taştan, Hüseyin

Abstract

This paper investigates the role of internal finance in determining firms’ fixed capital investments in an emerging economy. Using a comprehensive panel data set from Turkish unlisted small and medium-sized enterprises (SMEs) in the manufacturing sector, we estimate a set of dynamic firm investment models in which the marginal impact of cash flow on investment is allowed to vary with the central bank’s monetary policy stance, financial conditions at the macro level and the Global Financial Crisis (GFC). According to the system-GMM estimation results, the sensitivity of investment to cash flow is positive and statistically significant, implying that firms are constrained by internal finance. Empirical results suggest that the degree of investment-cash flow sensitivity significantly varies with the monetary policy stance. While the investment-cash flow sensitivity declines during periods of expansionary monetary policy for financially constrained firms, the evidence is not conclusive for less-constrained firms that can access external finance relatively easily. We also find that investment-cash flow sensitivity declines when broader macro-financial conditions are relatively supportive. Furthermore, firms’ cash flow needs grow considerably during recessionary periods (e.g., the GFC) compared to expansionary periods due to less availability of external funds.

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  • Gül, Selçuk & Taştan, Hüseyin, 2020. "The impact of monetary policy stance, financial conditions, and the GFC on investment-cash flow sensitivity," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 692-707.
    • Handle: RePEc:eee:reveco:v:69:y:2020:i:c:p:692-707
    DOI: 10.1016/j.iref.2020.06.030
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    More about this item

    Keywords

    Investment-cash flow sensitivity; Financing constraints; Monetary policy stance; Financial conditions index;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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