The external finance premium and the financial accelerator : the case of Turkey

The monetary transmission mechanisms have influence on saving and investment decisions of firms and households by affecting their balance sheets. This study examines the effects of monetary policy through the balance sheet channel (also known as ‘financial accelerator’), which affects net worth, liquidity and spending of firms and households through external finance premium. The aim of this study is to analyze the effect of monetary contraction which raised the external finance premium and thus the effect of the increase in the external finance premium which diminishes output for Turkey over the period of 2003:01-2010:08 by using VAR (vector autoregressive models), impulse-response analysis and forecast error variance decomposition. The results indicate that contractionary monetary policy shock, which led to increased external finance premium, negatively affected the manufacturing sector and decreased total output. In other words, the monetary shock negatively affected firms’ balance sheets in the short-run.