Documenti di Didattica
Documenti di Professioni
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Juda Agung*
Rita Morena
Bambang Pramono
Nugroho Joko Prastowo
_________________________
* The authors thank Hartadi A Sarwono, Perry Warjiyo, Sjamsul Arifin, Wibisono, and Sri
Liani Suselo for their consistent encouragement and thoughtful comments to this study.
Of course, any errors and ommisions are our responsibility. The findings and conclusions
in this study are those of the authors and do not necessarily represent the views of Bank
Indonesia.
Abstract
Using panel data of companies listed in Jakarta Stock Exchange over the
period 1993-1999 and survey on non-financial firms, we show that
monetary policy influences the investment through its impact on the
firms‟ balance sheet. These results provide evidence for the existence of
balance sheet channel of monetary transmission.
1
1. Introduction
the real economy has been a hot topic in the literature. In particular,
transmission has been put forward in the literature.1 One of variants of this
creditworthy and the external funds become more costly, hence lowering
investment.
the East Asian countries in the aftermath of financial crisis that has been
1
See Bernanke and Gertler (1995) and Hubbard (1998) for the survey.
2
“…[the] third-generation crisis .. emphasises two factors that have
been omitted from formal models to date: the role of companies‟
balance sheets in determining their ability to invest, and that of
capital flows affecting the real exchange rate‟ (pp.3).
such as Indonesia since the wake of the Asian crisis, understanding the
effects of monetary policy on the firm financial structure and thus their
high interest rate not only increases the cost of capital for investment but
also worsens the quality of firms‟ assets. This in turn amplifies the impact
firm‟s balance sheet and thus their investment decision. While the
3
investment has been abundant2 and generally confirms the hypothesis,
balance sheet channel is relatively few. Oliner and Rudebusch (1996) for
US, and Minguez (1997) for Spain and Germany are among the notable
exceptions.
a rather different context, using panel data of listed firms over period
1992-1997, Agung (2000) investigates the role of cash flow and leverage
hypothesis, the latter does not explicitly test whether the firm balance
crisis period, i.e., the data covers 1992-1999. By including the crisis period
2
See a comprehensive survey by Hubbard (1998).
4
notable monetary shock indeed influences the investment through its
reviews the balance sheet channel and the framework for empirical
5
2. The Balance Sheet Channel
The theory of balance sheet channel stems from the fact that the
fact that by making such risky projects, the firm retains most of the profits if
the project is successful while debt holders (e.g. banks) incur most of the
losses if the project ends in failure. To compensate lenders for the costs
into:
r̂ =rf + (1)
where rf is the risk-free interest rate such as the policy interest rate, is the
risk adjustment specific for the firm. If the credit market is perfect, the
credit market when lenders impose premium on external funds (), the
6
Figure 1. The balance sheet channel: Magnification of a Monetary Shock
Cost of
Funds (r)
S2
S’ 1
S1
r2
D
r1
Internal Funds
0 F I2 I’ 1 I1
Investment (I)
the level of borrowings (L), the higher loans (borrowings) the firm raises,
the higher is the probability of moral hazard that can arise and hence the
higher premium the firm will have to pay. This is reflected by the upward
on the level of risk free interest rate. The higher the level of risk free
interest rate, the lower the discounted value of borrowers‟ collateral, thus
7
Since under imperfect credit market the costs of borrowing can
the costs of borrowing, thus investment (I), not only through the direct
effect on interest rate (interest rate channel) but also on through the
r rˆ
f f (3)
r f
r r
interest rate, pushes the supply schedule from S1 to S2, instead of S1‟. The
direct effect of a rise in risk free rate on the costs of external funds is
S1‟ to S2. The real effect of monetary policy through the balance sheet is
r I (4)
and supply of loans, as described above, takes the following form:
8
where (L,rf) = rf L, L = I – F. With > 0, L > 0 and rf > 0. Equating
I rf
(6)
F r f
and
I r f
(7)
B
investment to the balance sheet position, equations (6) and (7) are
I rf
0 (8)
Fr f ( r f )
and
I
0 (9)
Lr f
which is subject of the next section. That is, we test whether balance
sheet positions (cash flow and leverage) are significant in the firms‟
9
3. The Methodology and Data
hypothesis is that a monetary policy influences the firm‟s investment via its
investment spending.
The higher the cash flow, the more creditworthy and hence the higher
access of the firm to external funds. The second indicator is the ratio of
third balance sheet indicator is sort term debt to total debt to measure
the extent the firm has to finance itself short-term rather than long term
and therefore related to its access to long term finance. The higher short-
term debt as a fraction of total debt indicates the weaker the balance
sheet.
10
not because of the shifts in demand for capital stock induced by the
some studies use Tobin‟s q (Fazzari, Hubbard and Petersen, 1988, inter
alia), the Euler equation approach (Bond and Meghir, 1994, Agung, 2000)
Oliner, Rudebusch and Sichel, 1995) the model usually performs better
than the more sofisticated investment models, such as Euler and Tobin‟s q
approaches.
IK i ,t 1 IK i ,t 1 2 SK i ,t 1 3 Bi ,t 1 i t it (10)
i,t is a serially uncorrelated error term which is also uncorrelated with all
11
The second hypothesis is whether the sensitivity of the firms‟
IK i ,t 1 IK i ,t 1 2 SK i ,t 1 ( 31 32 M t ) Bi ,t 1 i t it (11)
outside the contraction period only. The coefficient 32 measures the
negative for Bt-1 measured by DK t-1 and SD t-1, and positive when
measured by CK t-1.
identify the periods of monetary contraction (Mt ). Given our data covers
12
Year rSBI Private
Investme
nt
1993 10.89 5.7
1994 10.19 18.6
1995 13.83 21.7
1996 13.55 15.2
1997 15.08 6.8
1998 49.73 -32.3
1999 22.31 -21.0
(10) and (11). There are several econometric issues which should be
between the regressors and the firm specific effects, i.e., E(xit i ) 0.
Second, the possible endogeneity of regressors with respect to it, i.e. E(xit
disturbance it since the panel data covers many heterogenous firms and
of equations (10) and (11) and lagged levels of variables are used as
13
instruments. The use of lagged variables3 as instruments is only valid if it is
that it is serially uncorrelated, in the first difference models, the error term
serial correlation should not exist in it. Arrelano and Bond (1991) provide
and Arrelano (1996) also found that the first-differenced GMM estimator
setting of dynamic panel data models with a small number of time series
equations. Some progress has been made by Blundell and Bond (1998)
3
i.e. t-2 and further lags for endogenous variables and t-1 and further lags for predetermined
variables.
14
the initial conditions process which allows the use of lagged first
series observations, we follow this approach and use the DPD v1.2
program (Doornik, Arrelano, and Bond, 1999) which was run in the Ox v3.
efficient estimation.
3.3. Data
during 1992-1999.
increased by a factor of ten or more from one year to the next. Finally,
requires lag of capital stock, the sample data becomes 1993-1999. The
15
summary of statistics of variables used is presented in Table 1 and details
declined since 1997 when Rupiah started to depreciate and interest rate
started to rise, and the investment ratio become negative in 1999. The
16
4. Evidence for a Broad Credit Channel
sheet channel, i.e., whether the firms‟ balance sheet positions influence
addition to reporting the estimates by the use of the GMM-SYS, for the
OLS. The results indicate no sign of second order serial correlation of the
capital ratio (DK) and short-term debt to total debt (SD) are negative,
while the coefficients on cash flow are positive. The coefficients on the
cash flow are significant by the use of GMM and OLS, while the
investment. The survey results (Appendix 2) also suggest that the firm‟s
17
Table 2. Firms’ balance sheet position and investment rate
Variable GMM1 GMM2 OLS GMM1 GMM2 OLS GMM1 GMM2 OLS
IK(-1) -0.05 -0.02 -0.65 -0.05 -0.02 -0.67 -0.03 -0.02 -0.52
(-0.91) (-0.50) (-12.45)** (-1.34) (-0.78) (-13.79)** (-0.71) (-0.45) (-12.05)
SK(-1) 0.09 0.09 0.06 0.07 0.08 0.04 0.05 0.06 0.07
(4.12)** (4.11)** (3.58)** (3.43)** (4.86)** (2.53)** (1.74)* (1.67)** (3.91)**
DK(-1) -0.06 -0.04 -0.09
(-1.52) (-1.39) (-4.56)**
CK(-1) 0.23 0.25 0.15
(2.63)** (3.33)** (6.58)**
SD(-1) -0.12 -0.11 -0.11
(-1.33) (-1.85)* (-1.41)
Wald test 21.99 18.53 24.22 39.90 14.34 10.61
P [0.00] [0.00] [0.00] [0.00] [0.00] [0.01]
Sargan 178.20 86.50 238.80 75.43 154.80 87.37
test
P [0.00] [0.01] [0.00] [0.05] [0.00] [0.00]
M1 -2.38 -2.47 -2.36 -2.40 -2.39 -2.45
P [0.02] [0.01] [0.02] [0.02] [0.02] [0.01]
M2 0.69 0.66 0.91 0.92 0.76 0.71
P [0.45] [0.51] [0.37] [0.36] [0.45] [0.48]
Note:
Number of sample: 192 firms. Sample period is 1993-1999.
M1, M2 are first-order and second-order serial correlation tests, both are asymptotically
N(0,1)
Numbers in the ( ) is t-stat, and in the [ ] is p-value
* Significant at 10%, ** Significant at 5%,
different class of firm, we differentiate the sample into small and large
firms. Firms whose asset is greater than sample median are classified as
large firm, and otherwise classified as small firms. The results for the
indicators for large firms are generally small and not significant. By
contrast, the corresponding coefficients for small firms are significant and
larger than that of large firm. This indicates that the investment of smaller
18
firms is more sensitive to their balance sheet position than that of larger
firms.
Variable Small Firms Large Firms Small Firms Large Firms Small Firms Large Firms
IK(-1) 0.001 -0.16 0.003 -0.14 -0.01 -0.12
(0.05) (-1.67)* (0.13) (-1.67)* (-0.51) (-1.82)*
SK(-1) 0.08 0.12 0.08 0.04 0.05 0.10
(4.06)** (2.07)** (1.69)* (1.49) (4.73)** (2.81)**
DK(-1) -0.10 -0.05
(-2.65)** (-0.78)
CK(-1) -0.30 -0.08
(-1.53) (-1.49)
SD(-1) 0.37 0.13
(4.00)** (1.05)
Wald test 16.59 13.94 6.198 7.51 83.48 14.24
P [0.00] [0.00] [0.10] [0.06] [0.00] [0.00]
Sargan test 56.78 59.76 52.91 61.41 45.47 67.90
P [0.48] [0.38] [0.63] [0.32] [0.86] [0.15]
M1 -1.40 -2.18 -1.39 -2.25 -1.40 -2.30
P [0.16] [0.03] [0.16] [0.02] [0.16] [0.02]
M2 -0.93 0.79 -0.94 0.87 0.06 0.85
P [0.35] [0.43] [0.35] [0.38] [0.96] [0.39]
Note:
Sample of large firms: 96 firms, small firms: 96 firms. Sample period is 1993-1999.
M1, M2 are first-order and second-order serial correlation tests, both are asymptotically
N(0,1)
Numbers in the ( ) is t-stat, and in the [ ] is p-value
* Significant at 10%, ** Significant at 5%.
19
during the monetary tightening, the investment is more sensitive to firm‟s
leverage (DK) and short-term debt (SD). In fact, outside the period of
Harris, et al (1994) who use sample of before the crisis. They argue that a
those variables (MDK and MSD) are negative and significant, as our prior
accelerator during the contraction period, the results for cash-flow ratio is
less encouraging. That is, during the contraction period, firms‟ investment
outside the contraction is 0.53, but during the contraction, the coefficient
of cash flow only 0.15 (0.53-0.38). The lower sensitivity of cash flow can be
20
profitability. That is, during the contraction period, the cash flow contains
Variable GMM1 GMM2 OLS GMM1 GMM2 OLS GMM1 GMM2 OLS
IK(-1) -0.04 -0.04 -0.64 -0.06 -0.04 -0.68 -0.03 -0.03 -0.54
(-0.91) (-0.92) (-12.42)** (-1.43) (-0.95) (-13.91)** (-0.56) (-0.57) (-12.27)**
SK(-1) -0.08 0.06 0.06 0.06 0.07 0.04 0.07 0.07 0.07
(2.63)** (2.18)** (3.51)** (3.19)** (3.52)** (2.24)** (2.59)** (2.88)** (3.88)**
DK(-1) 0.02 0.13 -0.06
(0.22) (1.71)* (-1.15)
MDK(-1) -0.07 -0.15 -0.03
(-1.03) (-2.41)** (-0.65)
CK(-1) 0.58 0.53 0.38
(3.02)** (2.99)** (3.25)**
MCK(-1) -0.48 -0.38 -0.23
(-1.92)* (-1.63)* (-1.99)**
SD(-1) 0.03 0.10 -0.05
(0.25) (1.11) (-0.63)
MSD(-1) -0.11 -0.18 -0.13
(-1.65)* (-3.16)** (-2.41)**
Wald test 27.05 30.48 64.44 71.90 31.47 61.12
P [0.00] [0.00] [0.00] [0.00] [0.00] [0.00]
Sargan 79.50 72.45 229.70 78.04 160.20 75.46
test
P [0.00] [0.50] [0.00] [0.32] [0.00] [0.40]
M1 -2.39 -2.39 -2.29 -2.31 -2.35 -2.37
P [0.02] [0.02] [0.02] [0.02] [0.02] [0.02]
M2 0.67 0.58 1.24 1.13 0.67 0.53
P [0.50] [0.56] [0.25] [0.26] [0.50] [0.54]
Note:
Each regression uses sample of 192 firms. Sample period is 1992-1999
M1, M2 are first-order and second-order serial correlation tests, both are asymptotically
N(0,1)
Numbers in the ( ) is t-stat, and in the [ ] is p-value
* Significant at 10%, ** Significant at 5%
21
Table 5. Response of firm’s balance sheet to a monetary shock: small vs
large firms
Variable Small Firms Large Firms Small Firms Large Firms Small Firms Large
Firms
IK(-1) -0.01 -0.11 0.01 -0.12 -0.03 -0.13
(-0.60) (-1.17) (0.61) -1.49 -0.71 -1.86*
SK(-1) 0.05 0.11 0.09 0.08 0.04 0.08
(2.25)** (1.34) (1.81)* 2.19** 2.05** 2.10**
DK(-1) 0.05 0.04
(0.52) (0.22)
MDK(-1) -0.15 -0.06
(-1.54) (-0.64)
SD(-1) -0.12 0.15
(-0.50) (2.12)
MSD(-1) -0.07 -0.17
(-0.53) (-2.27)**
CK(-1) 0.59 0.72
(2.80)** (2.31)**
MCK(-1) -0.32 -0.74
(-1.34) (-1.96)**
Wald test 22.78 16.00 23.95 17.86 116.30 23.87
P [0.00] [0.00] [0.00] [0.00] [0.00] [0.00]
Sargan test 54.92 53.53 58.07 65.70 44.99 65.74
P [0.94] [0.96] [0.89] [0.72] [0.99] [0.71]
M1 -1.40 -2.24 -1.39 -2.25 -1.37 -2.22
P [0.16] [0.02] [0.16] [0.025] [0.17] [0.02]
M2 -1.00 0.88 -1.02 0.88 0.89 0.82
P [0.32] [0.38] [0.31] [0.38] [0.37] [0.41]
Note:
Sample of large firms: 96 firms, small firms: 96 firms. Sample period is 1993-1999.
M1, M2 are first-order and second-order serial correlation tests, both are asymptotically N(0,1)
Numbers in the ( ) is t-stat, and in the [ ] is p-value
* Significant at 10%, ** Significant at 5%.
external funds for small firms are likely higher than large firms, it is valid to
expect that the small firms is most likely to be most influenced by the
the sample split of large and small firms. The results are presented in Table
22
contraction. Although the interaction of leverage and monetary
contraction (MDK) for small firms is larger than that of large firms, it is only
significant at 15%.
Furthermore, while the coefficients of MSD and MCK for large firms
are significant, those for small firms are insignificant. There are two
reasons explaining these findings. First, since the foreign liabilities of the
large firms are higher than the small firms, their balance sheets are more
covers only the listed firms, there probably is „a selection bias in favour of
picking only the best of small firms‟ (Devereux and Schiantarelli, 1990,
pp.83).
5. Conclusions
firms over the period 1992-1999. The empirical evidence suggests that
firm balance sheet variables (cash flow and leverage) is very important
determinant in the firm investment and the investments of small firms are
more sensitive to their balance sheet changes than those of larger firms.
The most important finding is that the sensitivity of investment with respect
23
of balance sheet channel in Indonesia. However, we find no evidence
that the investments of smaller firms more badly suffered than larger firms
during the contraction period, perhaps due to less exposure of the smaller
firms to domestic currency depreciation that occurs along with the period
of monetary contraction.
effects on the real investment through firms balance sheet are supported,
the question whether the easing monetary condition improves the firm
balance sheet, thus investment, is not answered yet in this study. Under
policy, i.e., stronger negative effect in the case of contraction but less
(export vs domestic).
24
References
25
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Doornik, J.A., Arrelano, M. and Bond, S. (1999). Panel Data Estimation
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Gertler, M (1988). financial structure and aggregate economic activity:
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26
Appendix 1. Definition of variables used
It = Kt - Kt-1 + DEPt
Debts (Dt ) is calculated as the sum of both short and long-term securities
and loans including overdrafts.
27
Appendix 2. Survey Results
In line with the economic recovery process, during the last three
years, 42% of firms increased investment, 16% of firms reduce investment,
and 42% of firms did not conduct any investment. The increase in
investment experienced by all business sectors, except for
property/constructions sectors. This finding supports the econometric
results that the property sectors are badly suffered during the period of
monetary contraction.
Constant
Decrease
Increase
0 10 20 30 40 50
28
Table A1. Source of funds and investment behaviour during the last three
years
Sources of funds
Foreign
Internal Bank Capital borrowin
funds loans Market gs Total
Increase 37 13 2 2 54
Investment in the last 3 yrs
Financial factors
Non financial factors
Others 6%
2.2
Othes
Bank Credit Availability 9%
Production 28.1
Cash flow 52%
capacity
69.6
33%
Cost of Capital
Busines prospect
0% 10% 20% 30% 40% 50% 60%
0 10 20 30 40 50 60 70
29
Meanwhile, from non-financial aspects, the investment decision of
firms depends upon the future business prospect and capacity
utilization (production capacity). In the last three years, majority (68%)
of the firms do not have any obstacle to realise their investment, while
32% of the firms have obstacles in investment. As expected, the results
indicates that construction/property firms finds the most difficulties in
realising the investment.
30
Figure A.3. Investment obstacles
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Agriculture Manufacturing Trade Construction Total
31