Is there an active credit channel in Turkey? evidence based on manufacturing firms' balance sheets

The aim of this study is to test the validity of balance sheet and bank lending channels in Turkish setting by using panel econometric techniques over firm balance sheet data for a period of 1996-2015. Firm balance sheet data give quite useful information to assess functioning of the credit channel. This study uses a battery of dependent variables, firm-specific variables and monetary policy indicator. Since the study aims to indicate heterogeneities across firms, it uses random coefficient model. Thus, this model makes possible the analysis of heterogeneous responses of firms with different scales to monetary policy changes. The set of regressions that incorporate impact of the changes in monetary policy over external funding choices of firms is designated in accordance with the balance sheet and bank lending channels. Findings of this study indicate that all firms experience a decline in the volume of bank financing in both loosening and tightening periods and the results are more noticeable during monetary tightening. Hence, these findings are not consistent with balance sheet channel theory. Moreover, findings of the set of regressions show that monetary policy changes lead manufacturing firms to modify the composition of external financing. Firms rearrange their financing needs across bank credits and other debt instruments by decreasing the proportion of bank loans relative to non-bank debt instruments in both loosening and tightening times. However, findings indicate that non-bank debt instruments are not perfect substitutes for bank loans. Thus, empirical findings support the view that bank lending channel worked in Turkish setting in the examined period.