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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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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. repec:sae:niesru:v:139:y::i:1:p:88-94 is not listed on IDEAS
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  3. Chatelain, Jean-Bernard & Tiomo, André, 2001. "Investment, the cost of capital, and monetary policy in the nineties in France: a panel data investigation," Working Paper Series 0106, European Central Bank.
  4. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  5. Benito, Andrew & Garry Young, 2002. "Financial Pressure and Balance Sheet Adjustment by UK Firms," Royal Economic Society Annual Conference 2002 20, Royal Economic Society.
  6. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
  7. Von Kalckreuth, Ulf, 2001. "Monetary transmission in Germany: new perspectives on financial constraints and investment spending," Working Paper Series 0109, European Central Bank.
  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. Olympia Bover & Nadine Watson, 2000. "Are there Economies of Scale in the Demand for Money by Firms? some Panel Data Estimates," Banco de Espa�a Working Papers 0008, Banco de Espa�a.
  10. 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.
  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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