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Monetary policy and firms’ investment: Dynamic panel data evidence from Malaysia

  • Abdul Karim, Zulkefly

This study examines the effects of monetary policy on firms’ balance sheet, with a particular focus on the effects upon the firms’ fixed-investment spending. It uses a dynamic panel system GMM estimation proposed by Blundell and Bond (1998). The focal point has given to the two main channels of monetary policy transmission mechanism such as interest rates and broad credit channel in transmitting to firm investment spending. By estimating the firms’ investment model using a dynamic neo-classical framework, the empirical results tend to support the relevance of interest rates and broad credit channel in transmitting to the firm balance sheet condition that is firm’s investment spending. The results also reveal that the effect of monetary policy channels to the firms’ investment are heterogeneous fashioned, which is the small firms who faced financial constraint are responded more due to monetary tightening as compared to the large firm (less constraint firms). Thus, the monetary authority has to concern the microeconomic aspects of the firm in formulation their monetary policy.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23962.

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Date of creation: 10 Feb 2010
Date of revision: 15 May 2010
Handle: RePEc:pra:mprapa:23962
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