The Impact of Firm-Specific Characteristics on the Response to Monetary Policy Actions

This paper examines the impact of monetary policy on firms’ access to bank and market finance when allowance is made for differences in firm-specific characteristics. A theoretical model determines the cut-off values for project profitability that would allow firms to access bank or market finance. This model predicts that specific characteristics in terms of size, age, risk and debt can make a firm more vulnerable to tightening credit when interest rates increase. Empirically, the paper shows, using a panel of 16,000 UK firm records over 10 years, that firms distributed according to their type (asset size, rating etc) do have differing access to bank lending and market finance. Small, young and risky firms are more significantly affected by tight monetary conditions than large, old and secure firms. The evidence is consistent with a credit channel, and demonstrates that there are distributional implications from tightening monetary policy. +Experian Centre for Economic Modelling (ExCEM), University of Nottingham, University Park, Nottingham, NG7 2RD, UK. *Research Department, Central Bank of the Republic of Turkey, 06100-Ulus, Ankara., Turkey The authors acknowledge the financial support of Experian through the Experian Centre for Economic Modelling. The third author also thanks the European University Institute, Florence for their generous hospitality during the period that this paper was written. We acknowledge beneficial comments from Mike Artis, Anindya Banerjee, Giuseppe Bertola, Alan Duncan, John Goddard, Phil Mullineux, Robert Osei, Philip Vermeulen, Peter Wright and participants at the UNU/INTECH conference on ‘European Financial Systems and the Corporate Sector’, Maastricht, October 2002. Any remaining errors are our own. All the views expressed in this paper are those of the authors and do not necessarily represent the views of the Central Bank of the Republic of Turkey or its staff.