Content area
Full Text
1 Introduction
It is generally believed that monetary policy has a differential effect across sub-sector of firm's investment. Thus, a good understanding of the factors that influenced the differential of monetary policy effects across sub-sector investment is crucial to the monetary authority in making an accurate assessment about the overall economic effects of policy transmission process.
The differential of monetary policy effects across sub-sector firms' investment can be explained by three possible reasons. First, the interest rate sensitivity of the demand for product differs according to the durability of the goods produced in the particular sector. For example, the demand for product in cyclical industries (durable goods) is more affected by the changes in the interest rates than the demand for non-durables goods (less-cyclical industries). Second, industries that are more capital intensive are expected to be more sensitive to the changes in the user cost of capital, which itself will depend on changes in interest rates. An increase in interest rates will increase the cost of capital (for example, an increase in cost of holding inventories), and affect their production (capital cost channel) and investment. Third, the effect of monetary policy also depends on the degree of openness of an industry (the ratio of exports and imports over value added). For example, tradable goods industries (export-oriented industries) are likely to be more affected by monetary policy. This is because a monetary policy tightening will generally lead to an exchange rate appreciation, which reduces the competitiveness of the sector, and may have negative effect on external demand. As a result, the firm will contract their investment spending in response to the deterioration of an external demand.
The aims of this paper is to explore the role of monetary policy transmission mechanism channel on firms' investment spending by using disaggregated publicly listed companies' dataset. Particular focus is given to investigate the differential of monetary policy effects across sub-sector firms' investment by examining the role of interest rates, and broad credit channel of monetary transmission. For this purpose, the following research design has been employed in examining the relevance of both monetary policy channels. First, the firm user cost of capital as a proxy for the interest rates channel is constructed using the methodology proposed by [25] Chirinko