Gadjah Mada International Journal of Business
Vol 9, No 1 (2007): January - April

Monetary Policy, Debt and the Cyclical Behavior of Inventories

Ismail, Abdul Ghafar ( International Islamic University Malaysia (IIUM))
Bahari, Zakaria ( Department of Economics, School of Social Sciences, Universiti Sains Malaysia)

Article Info

Publish Date
12 Jan 2007


An earlier study on the determinants of inventories investment has been proposed by Lovel (1961). However, the study fails to mention the effects of financial variables. The puzzle prevails on account of imperfect capital markets. This implies that interest rate generally affects inventory investment indirectly through the debt channel. For instance, in the period of tight monetary policy, increasing interest rates have a negative impact on the present value of firms’ collateralizable net worth. In addition, they also weaken firms’ balance sheets as interest expenses also rise up. In imperfect capital markets, this fact indicates an increase in the amount of external financing that firms need, a rise in the premium on external financing that they face, and a reduction in their accumulation of assets, their spending and their production. Given the low adjustment cost that characterizes firms, it will be inventories that firms will initially reduce. Therefore, this paper is contributes to the issue of monetary policy transmission in Malaysia. Our specific attention is limited to the channel of monetary policy on a firm’s inventory. Using micro data, we try to take into account the relevance of the firm’s balance sheet conditions in the transmission of monetary policy.

Copyrights © 2007

Journal Info





Economics, Econometrics & Finance


Gadjah Mada International Journal of Business (GamaIJB) is a peer-reviewed journal published three times a year (January-April, May-August, and September-December) by Master of Management Program, Faculty of Economics and Business, Universitas Gadjah Mada. GamaIJB is intended to be the journal for ...