The impact of financial constraints and monetary policy on firm investment behavior: Evidence from Turkey

Monetary policy affects not only the financial markets but also the real sector and the general economy. Additionaly firm level investment might be affected by monetary policy implications. Morever, cash flows and financial constraints are substantial consepts in terms of firm level investment. This study examines the effects of financial constraints and monetary policy on firms' investment behavior. Analysis are made for the period between 2005-2020 using manufacturing industry companies dataset which are listed in Borsa Istanbul index. The research model is derived from neoclassical investment theory. The effect of monerary policy on firm investment is tested directly via user cost of capital and tested whether interest rate channel of monetary transmission mechanism works in Turkey or not. Emprical findings show that monetary policy effects firm investments through user cost of capital. Consequently, interest rate channel of monetary transmission mechanism works in Turkey. In addition to that the results indicate that the firms are not financially constrained.