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Balance Sheet Channel of Monetary Policy and Economic Growth under Fiscal Dominance: Evidence from Pakistan

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  • Shabbir, Safia
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    Abstract

    Using micro data on non-financial listed companies in Pakistan, over the period of 2000-2010, this paper emphasizes over the impact of monetary policy on economic growth through balance sheet channel. At first step, monetary tightening deteriorates the net worth of the firms and leads to cash flow squeeze; of which later affects the economic growth. We find this impact to last for three years over the balance sheets of the firms. Since, industrial sector drives the economic growth; we forecast corporate profitability at the second step. Empirical investigation shows that corporate profitability reverts to its mean at the rate of 25 percent. During Peak, mean reversion is 30 percent while it is 19 percent during trough implying that recession stays relatively longer and economic revival is slow during recessionary phase.

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    File URL: http://mpra.ub.uni-muenchen.de/42855/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 41496.

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    Date of creation: 14 Sep 2012
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    Handle: RePEc:pra:mprapa:41496

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    Related research

    Keywords: Monetary policy; monetary transmission; balance sheet channel; forecasting; profitability;

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    1. Michael, Kumhof & Ricardo, Nunes & Irina, Yakadina, 2007. "Simple Monetary Rules under Fiscal Dominance," MPRA Paper 4462, University Library of Munich, Germany.
    2. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May.
    3. Guariglia, Alessandra & Mateut, Simona, 2006. "Credit channel, trade credit channel, and inventory investment: Evidence from a panel of UK firms," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2835-2856, October.
    4. Eugene F. Fama & Kenneth R. French, . "Forecasting Profitability and Earnings," CRSP working papers 456, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    5. Ali Choudhary & Amjad Ali & Shah Hussain & Vasco J Gabriel, 2012. "Bank Lending and Monetary Shocks: Evidence from a Developing Economy," Working Papers id:4771, eSocialSciences.
    6. Oliner, Stephen D & Rudebusch, Glenn D, 1996. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance: Comment," American Economic Review, American Economic Association, vol. 86(1), pages 300-309, March.
    7. José Sidaoui, 2003. "Implications of fiscal issues for central banks. Mexico's experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal issues and central banking in emerging economies, volume 20, pages 180-197 Bank for International Settlements.
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