Fixed investment, liquidity constraint, and monetary policy: Evidence from Japanese manufacturing firm panel data

•We analyze the monetary policy effects on the firms' fixed investment.•We use the panel data of Japanese manufacturing firms.•Contractionary monetary policy increases the firms' liquidity constraint.•The smaller the firm size, the greater the effects of contractionary monetary policy.•Quantitative monetary easing policy decreases the firms' liquidity constraint.

We empirically analyze the effects of monetary policy shocks on real fixed investment using panel data on Japanese manufacturing firms to examine the existence of a balance sheet channel. We find that contractionary monetary policy statistically significantly increases the firms' liquidity constraint. Especially, the smaller the firm size, the greater the effects of contractionary monetary policy. Therefore, our estimation results support the presence of a balance sheet channel. In addition, the firms' liquidity constraint decreases significantly during quantitative monetary easing policy (QMEP) period. Specifically, QMEP relaxes the liquidity constraint of large firms. Our evidence suggests that QMEP transmission works through the balance sheet channel and affects the real economy.