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

Eleni Angelopoulou · Heather D. Gibson

49 citations0/0 files storedEconomica

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Monetary Policy and Economic Impact Corporate Finance and Governance Working Capital and Financial Performance

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.

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References

1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1981Credit Rationing in Markets with Imperfect Information 1996Agency costs of free cash flow, corporate finance, and takeovers 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1984Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have 1988Financing Constraints and Corporate Investment 1998The Financial Accelerator in a Quantitative Business Cycle Framework

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