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Reserve Bank of Australia

By Karen Mills, Steven Morling, Warren Tease, Tom Rohling and Geoff Shuetrim

Abstract

Glenn Stevens for their thoughtful contributions to the paper. Remaining errors are ours. The views expressed in this paper are those of the authors and do not Recent theoretical developments have shown that cash flows and the structure of a firm’s balance sheet may have an important influence on investment. Establishing a link between cash flows, leverage and investment provides insights into the way that monetary policy and cyclical factors more generally influence the corporate sector. If cash flows are an important determinant of investment, then changes in monetary policy (by changing interest rates) will influence investment through a cash flow effect as well as through altering the rate at which the returns to investment are discounted. If this is the case, the higher leverage of the corporate sector implies, other things being equal, that monetary policy may have a larger impact on investment than in the past. Furthermore, it suggests that the effects of monetary policy will be felt unevenly across the corporate sector. The cash flows of highly geared firms will be more sensitive to changes in interest rates than cash flows o

Year: 1994
OAI identifier: oai:CiteSeerX.psu:10.1.1.195.5294
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