Effect of Monetary Policy on the Working Capital of Manufacturing Firms in Iran

One of the most important monetary transmission mechanisms that affects the economy from the supply side is the working capital channel. Given the existence of financial repression in Iran’s money market (administrative determination of bank interest rates, which in most periods are set below inflation), answering the question of whether this mechanism is active in the Iranian economy is of great importance. For this purpose, using annual data from 356 listed companies during the period 2004–2023 (1383–1402 in the Iranian calendar) and employing the dynamic panel GMM estimation method, the effects of monetary variables (bank interest rates and liquidity growth) on firms’ working capital have been examined. The estimation results indicate that bank interest rates have a negative and significant effect on firms’ working capital, while liquidity growth has no significant effect. Moreover, decomposing the operational working capital ratio into two components—the inventory ratio and the trade credit ratio—shows that bank interest rates affect the overall operational working capital ratio only through a negative effect on the trade credit ratio. The findings also reveal that the effect of bank interest rates is not uniform across firms and is stronger for smaller firms and those with higher leverage. In addition, the working capital of firms with a considerable share of imported inputs is not affected by bank interest rates. Based on the results, it is recommended that policymakers take into account the negative side effects of interest rate increases, which may manifest as a reduction in the supply side of the economy.