Implicit interest rates and corporate balance sheets

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 24 June 2003

Working paper no. 193
Andrew Benito and John Whitley

Credit channel models emphasise the importance of financial variables in macroeconomic responses to unanticipated economic events. In this paper empirical models are developed that relate implicit interest rates paid by firms to measures of their financial health (principally capital gearing) using both aggregate data and information from individual company accounts. Both aggregate and disaggregated approaches confirm a significant influence on interest rates from changes in the financial health of companies. The aggregate relationship finds support for the hypothesis that implicit interest rates depend on the initial level of indebtedness in a non-linear way. The estimated equation is used within the Bank of England’s macroeconomic model (extended to incorporate the balance sheets of the corporate and household sectors) to simulate the role of the credit channel mechanism in response to shocks.

PDFImplicit interest rates and corporate balance sheets: an analysis using aggregate and disaggregated UK data

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