Financial pressure, monetary policy effects and inventories: Firm-level evidence from a market-based and a bank-based financial system

This paper examines the adjustment of inventories by firms in the United Kingdom and Spain, which have two quite different financial systems. A widely held view is that a key channel for monetary policy is through the influencing of inventory accumulation. Using a large company-level panel data-set for both countries, significant effects associated with borrowing costs on inventories are estimated. Financial effects associated with liquidity and the borrowing ratio are estimated to be stronger in the UK than in Spain. Since the Spanish financial system is bank-based, while that of the UK is market-based, this is interpreted as contrary to the Bank Dependence Hypothesis.