Firm investment, monetary transmission and balance-sheet problems in Japan: an investigation using micro data

This paper investigates what can be learned about the effects of monetary policy on firm investment after the collapse of the asset price bubble in Japan. By estimating firm investment functions based on corporate panel data, the paper reveals that the monetary easing worked through the interest rate channel, but its effect through the credit channel was blocked because of a deterioration in balance-sheet conditions. The paper finds that this deterioration in balance-sheet conditions, especially in bank balance-sheet conditions, hampered investment by smaller non-bond-issuing firms more severely than that by larger bond-issuing firms. (c) 2004 Elsevier B.V. All rights reserved.