The Effect of Financial Development on The Firm Balance Sheet Channel

The objective of this article is to investigate the impact of financial development on the balance sheet channel of monetary policy transmission. For this purpose, first, using data (2007-2018) related to 50 non-financial firms in the Tehran Stock Exchange, the existence of the balance sheet channel in Iran through Analyzing the effect of the financial and balance sheet situation of firms on their investment was examined.Therefore, using GMM method, an investment function is estimated, despite financial constraints. The results supported the balance sheet channel of monetary policy transmission in Iran. In addition, the effect of financial development on the balance sheet channel by testing the effect of interaction of financial development on balance sheet situation was examined. The results of the model estimate showed that financial development increased the investment of firms by reducing financial constraints, which means weakening the balance sheet channel of monetary policy transmission. The results also showed that financial development affected the investment of small firms that were facing more financial constraints compared to larger firms.