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Monetary Policy Transmission and Firms’ Investment: Evidence From the Manufacturing Sector of Pakistan

Author

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  • Arslan Majeed
  • Shahid Mansoor Hashmi
  • Romila Qamar

Abstract

This study explores the effects of monetary policy on firms’ business fixed investment spending through the interest rate and broad credit channels of monetary policy transmission mechanism in Pakistan. Due to the problem of endogeneity, Generalized Method of Moments (GMM) two step estimation technique is applied on neo-classical investment model by using disaggregated firm level data of manufacturing sector of Pakistan over the period 1974-2010. The results suggest the relevance of both the interest rate and broad credit channels in Pakistan. Firms’ investment found to be negatively affected by the monetary contraction while positively influenced by cash flow and the sales. Small firms explored to be more sensitive to the monetary tightening as compared to large firms indicating that monetary policy exerts heterogeneous effects. Results highlight the importance of considering the financial conditions of the firms in formulation of monetary policy.

Suggested Citation

  • Arslan Majeed & Shahid Mansoor Hashmi & Romila Qamar, 2017. "Monetary Policy Transmission and Firms’ Investment: Evidence From the Manufacturing Sector of Pakistan," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 20(66), pages 2-34, December.
    • Handle: RePEc:rej:journl:v:20:y:2017:i:66:p:2-34
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    References listed on IDEAS

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    More about this item

    Keywords

    monetary transmission mechanism; Firms’ Investment; Dynamic Panel Data; Manufacturing Sector of Pakistan;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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