The External Finance Premium in Brazil: empirical analyses using state space models.

Our objective in this paper is to estimate the external finance premium (EFP), which is a non observable variable, of firms in Brazil using state space models. For this purpose, we built an original database with confidential and public data containing balance sheet information of 5,026 public and private firms from the third quarter of 1994 to the fourth quarter of 2010. Our results show that the average and volatility of the EFP of small firms is higher than those of large firms and that the EFP is more sensitive to monetary policy for small firms than for large firms. We also find that the sensitivity in relation to EFP of inventories, short term debt and net operational revenues, all in proportion of total assets is higher for small firms than for large firms. These empirical evidences point to the importance of the balance sheet channel of the transmission mechanism of monetary policy in Brazil.