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Implicit interest rates and corporate balance sheets: an analysis using aggregate and disaggregated UK data

  • Andrew Benito
  • John Whitley

Credit channel models emphasise the importance of financial variables in macroeconomic responses to unanticipated economic events. In this paper empirical models are developed that relate implicit interest rates paid by firms to measures of their financial health (principally capital gearing) using both aggregate data and information from individual company accounts. Both aggregate and disaggregated approaches confirm a significant influence on interest rates from changes in the financial health of companies. The aggregate relationship finds support for the hypothesis that implicit interest rates depend on the initial level of indebtedness in a non-linear way. The estimated equation is used within the Bank of England's macroeconomic model (extended to incorporate the balance sheets of the corporate and household sectors) to simulate the role of the credit channel mechanism in response to shocks.

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File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2003/wp193.pdf
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Paper provided by Bank of England in its series Bank of England working papers with number 193.

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Date of creation: Jun 2003
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Handle: RePEc:boe:boeewp:193
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  1. Bover, Olympia & Watson, Nadine, 2005. "Are there economies of scale in the demand for money by firms? Some panel data estimates," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1569-1589, November.
  2. Chatelain, J-B. & Tiomo, A., 2002. "Investment, the Cost of Capital and Monetary Policy in the Nineties in France: A Panel Data Investigation," Working papers 96, Banque de France.
  3. Andrew Benito & Garry Young, 2002. "Financial Pressure and Balance Sheet Adjustment by UK Firms," Working Papers 0209, Banco de España;Working Papers Homepage.
  4. von Kalckreuth, Ulf, 2001. "Monetary transmission in Germany: New Perspectives on Financial Constraints and Investment Spending," Discussion Paper Series 1: Economic Studies 2001,19, Deutsche Bundesbank, Research Centre.
  5. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  6. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University.
  7. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  8. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
  9. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  10. repec:sae:niesru:v:139:y::i:1:p:88-94 is not listed on IDEAS
  11. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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