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The Effects of Monetary Policy on the Financing Methods of Firms : The Case of Korea

Author Jung Yongseung Date 1997.12.01 Page 0
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In the conventional macroeconomic paradigm issues of credit quality have long been ignored. However, as many economists and policy makers recognize that factors such as a credit crunch and overleverage of households and firms are closely related to economic recession and subsequent recovery, the issues of the credit-related aspects have moved to forefront of research topics in macroeconomics and monetary economics. In money and capital markets, without a standardized commodity there exists pervasive asymmetric information between lenders and borrowers. As the structure of financial markets is intimately related to the decisions of borrowers and lenders, the effect of monetary policy on firms can be different depending on the position of firms on their balance sheets. As the Korean government has not just implemented macroeconomics but also intervened deeply in the economy at the micro level, credit rationing by the government has been pervasive. In this paper, I investigate the relationship between the amount of credit rationed and the monetary policy using the firm level data of Korean firms. The main result of this paper shows that the effect of monetary policy on large firms is smaller than that on small firms in Korea. In particular, large firms who have more collateral and have developed a long-term relationship with banks are given priority for bank loans. If large firms cannot finance their business through bank loans, they resort to other external financing methods. Small firms with insufficient collaterals face difficulties in borrowing the money from banks. To reduce the asymmetric effects of monetary policy which disfavor small firms, the intervention of government into the financial market should be minimized. The development of the bond and equity markets is also necessary for the solid growth of large firms and small firms.