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