MONETARY POLICY AND FIRMS’ INVESTMENT IN MALAYSIA: A PANEL EVIDENCE

This study examines the effects of monetary policy on firms’ balance sheets, with a particular focus on the effects upon firms’ fixed-investment spending. It uses a dynamic panel system GMM estimation proposed by Blundell and Bond (1998). The focal point concerns the two main channels of monetary policy transmission mechanism, namely the interest rates and broad credit channels in affecting firms’ investment spending. By estimating the firms’ investment model using a dynamic neoclassical framework in an autoregressive distributed lagged (ARDL) model, the empirical results tend to support the relevance of interest rates and broad credit channels in transmitting to the firm balance sheet condition, that is, firms’ investment spending. The results also reveal that the effect of monetary policy channels to the firms’ investment are heterogeneous, in that the small firms which faced financial constraint responded more to monetary tightening as compared to the large firm (less constrained firms). Thus, the monetary authority has to consider the microeconomic aspects of firm behaviour in formulating their monetary policy.