Macro-fiscal analysis
Working paper

The size distribution of monetary policy effects between South African manufacturing firms: Firm-level evidence from administrative tax data

Keagile Lesame
March, 2019


Monetary policy is believed to have a disproportionate effect on firms depending on their size. Financially constrained firms with limited access to capital markets are expected to be more sensitive to changes in interest rates and this category of firms is characteristic of small-sized firms. This paper empirically tests this hypothesis for firms in the South African manufacturing sector using the South African Revenue Service’s comprehensive tax administrative dataset. Specifically, the interest coverage ratio is used to measure the debt-service burden of firms and therefore captures the effect of changes in interest rates on the debt burden of firms categorized by size. The empirical results provide some evidence to support the argument that the effect of monetary policy decisions on manufacturing firms systematically depends on firm size; smaller firms experience greater effect of interest rate changes. These findings suggest that the monetary authorities should take into consideration the balance sheet health of firms, particularly small sized firms, when making their monetary policy decisions.