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The Balance Sheet Channel of Monetary Policy Transmission: Evidence from the United Kingdom

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  • ELENI ANGELOPOULOU
  • HEATHER D. GIBSON

Abstract

This paper examines the cash flow sensitivity of investment using a panel of UK manufacturing firms to investigate the existence of a balance sheet channel. In addition to examining the impact of cash flow in different subsamples based on company size or financial policy, we investigate the extent to which investment becomes more sensitive to cash flow in periods of monetary tightness by employing a narrative indicator constructed for the United Kingdom. The results indicate that cash flow sensitivity in financially constrained firms is higher during periods of tight monetary policy and that financial constraints weaken with financial market sophistication. Copyright (c) The London School of Economics and Political Science 2008.

Suggested Citation

  • Eleni Angelopoulou & Heather D. Gibson, 2009. "The Balance Sheet Channel of Monetary Policy Transmission: Evidence from the United Kingdom," Economica, London School of Economics and Political Science, vol. 76(304), pages 675-703, October.
  • Handle: RePEc:bla:econom:v:76:y:2009:i:304:p:675-703
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    References listed on IDEAS

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    Cited by:

    1. Serafeim Tsoukas & Marina-Eliza Spaliara, 2014. "Market Implied Ratings and Financing Constraints: Evidence from US Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 242-269, January.
    2. Sami Alpanda & Uluc Aysun, 2012. "Global Banking and the Balance Sheet Channel of Monetary Transmission," International Journal of Central Banking, International Journal of Central Banking, vol. 8(3), pages 141-175, September.
    3. Aysun, Uluc & Hepp, Ralf, 2011. "Securitization and the balance sheet channel of monetary transmission," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2111-2122, August.
    4. Masuda, Koichi, 2015. "Fixed investment, liquidity constraint, and monetary policy: Evidence from Japanese manufacturing firm panel data," Japan and the World Economy, Elsevier, vol. 33(C), pages 11-19.
    5. Anna Malinowska, 2016. "The impact of monetary policy and agent heterogeneity on firm financing structure: evidence from the USA," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 46.
    6. Aysun, Uluc & Hepp, Ralf, 2013. "Identifying the balance sheet and the lending channels of monetary transmission: A loan-level analysis," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2812-2822.
    7. KOC, Umit & SAHIN, Hasan, 2014. "Parasal Aktarım Mekanizması: Firma Bilanço Kanalı ve Türkiye
      [Monetary Transmission Mechanism: Firm Balance Sheet Channel and Turkey]
      ," MPRA Paper 71979, University Library of Munich, Germany.
    8. Aysun, Uluc & Brady, Ryan & Honig, Adam, 2013. "Financial frictions and the strength of monetary transmission," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1097-1119.

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