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

Eleni Angelopoulou () and Heather D. Gibson ()

No 53, Working Papers from 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. (search for similar items in EconPapers)
JEL-codes: E22 E52 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-cba, nep-mac and nep-mon
Date: 2007-01
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Persistent link: http://EconPapers.repec.org/RePEc:bog:wpaper:53

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