A country's monetary policy influences a firm's economic decisions by influencing the cost of external debt offered to firms by commercial banks. However, research on the effect of monetary policy on the capital structure of firms located in bank credit-driven developing economies is limited. This research paper tries to fill that gap by examining the effects of monetary policy impulses on the short- and long-term capital structure of firms in an emerging economy. Using quadratic econometric equation and GMM regression model study analyzes annual financial data of 2575 non-financial firms belonging to 8 manufacturing sectors covering the duration of 13 years ranging from 2009 to 2021. The results show a curvilinear relationship between monetary policy impulses and firms' capital structure in different manufacturing industry sectors. Monetary policy was found to have a different impact on short-term and long-term borrowings of financially flexible and inflexible manufacturing firms.
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