Liquidity Demand of Heterogeneous Firms in the Economy of Iran: Microfoundation Approach

One of the main reasons in economic recession is the liquidity constraints of economic firms. When external finance becomes expensive for firms, money demand will act as a buffer stock. Actually, firms reduce unfavorable effect of liquidity constraints by holding money. In this study, after extracting firms liquidity demand function based on micro foundations and creating an index for firms liquidity constraints, using seasonal data of 334 active corporates in the Tehran Stock Exchange during the period of 2006-1 to 2021-4, the experimental model of the research, including two simultaneous equations, is estimated by the two-stage least squares method. Estimation result indicates the positive relationship between firm's liquidity demand and the liquidity constraint index. So that one percent increase in the liquidity constraint index increases the liquidity demand of constrained firms by 3.4 percent, while the same coefficient for unconstrained firms is 1.5 percent. As expected inflation is one of the main variables in the firms' liquidity demand, one percent increase in the expected inflation increases the liquidity demand of both constrained and unconstrained firms respectively by 1.3 and 0.6 percent. Although the effect of the costs of production factors, such as wages, the cost of capital and the relative price of imported goods -including changes in world prices and exchange rates- on the index of liquidity constraints is positive and significant, but their impact on the constrained firms are more severe. In credit crunching condition, the liquidity constraints of constrained firms increase more. Therefore, to prevent instability in credit cycles, the policy maker should focus more on constrained firms and pay attention to the money demand of heterogeneous firms in effectiveness of monetary policies.