THE BALANCE SHEET CHANNEL OF MONETARY POLICY
TRANSMISSION: EVIDENCE FROM THE UK
Eleni Angelopoulou
Bank of Greece and Athens University of Economics and Business
Heather D Gibson
Bank of Greece
ABSTRACT
This paper examines the sensitivity of investment to cash flow using a panel of UK firms in manufacturing with a view to shedding some light on the existence of a balance sheet channel or financial accelerator. In addition to examining the impact of cash flow in different subsamples based on company size or financial policy (dividend payouts, share issues and debt accumulation), we also investigate the extent to which investment becomes more sensitive to cash flow in periods of monetary tightness. To this end, we employ a monetary tightness indicator constructed for the UK using the narrative approach pioneered by Romer and Romer. The results provide some support for the view that UK firms show greater investment sensitivity to cash flow during periods of tight monetary policy.
Keywords: financial constraints, balance sheet channel, investment.
JEL classification: E22, E52, E44
Acknowledgements: We would like to thank Clive Massey at SWURCC at the University of Bath for his assistance in accessing the data used in this study. Tim Gallagher provided painstaking and conscientious research assistance financed, in part, by the Faculty of Social Sciences Small Grants Committee at the University of Kent at Canterbury.
Heather D. Gibson,
Economic Research Department
Bank of Greece, 21 E. Venizelos Ave.,
102 50 Athens, Greece
Tel.: +30 210 3202415, Fax.: +30 210 3233025
Email: hgibson@bankofgreece.gr