The balance sheet channel of monetary policy: the panel evidence of Egypt

Mohamed Aseel Shokr, Zulkefly Abdul Karim and Mohd Azlan Shah Zaidi

Macroeconomics and Finance in Emerging Market Economies, 2017, vol. 10, issue 3, 286-305

Abstract: This paper examines the effects of monetary policy on firms’ investments in Egypt using disaggregated data and generalized method of moments (GMM) technique. It develops the neoclassical investment model by adding the interaction between user cost of capital and cash flow (CF). Therefore, monetary policy affects investment through three effects: user cost of capital, CF and interaction between them. Using a sample of 124 firms, the empirical finding supports the relevance of balance sheet channel (BSC) and the heterogeneous effect of monetary policy on investment. This finding signals that monetary authority should take cognizance of the stability of interest rate to stabilize firm-level investment.

Date: 2017
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DOI: 10.1080/17520843.2016.1252409

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