Do Instruments of Monetary Policy and Fiscal Policy Affect Firm-level Leverage? Evidence from Pakistan and India


  • Zia ur Rehman
  • Dr. Muhammad Ayub Siddiqui
  • Sher Ali Khan
  • Asad Khan


Monetary policy, fiscal Policy, tax revenue, public debt, real interest rate, M2, leverage JEL Classification: E42, E52, E62, F31


Monetary and Fiscal policy instruments are important macroeconomic variables that may influence the financing choices of a firm. However, empirical evidence with respect to their influence on firm-level leverage is somewhat under researched particularly in the context of developing countries. The main
objective of this study was to measure the influence of monetary and fiscal policy instruments on the leveraging of non-financial firms listed of Pakistan and India for the period 2006-2017. The findings of the study revealed that monetary and fiscal policy instruments do influence leverage decisions of listed firms in
Pakistan and India, however, the extent of their influence varies in both countries. In Pakistan, except real interest rates all other monetary and fiscal policy instruments significantly influence leveraging decisions of listed firms whereas in India only real interest rates significantly influence leverage decisions of listed firms. Moreover, in Pakistan only incomes taxes negatively influences leverage whereas all other variables positively influence leverage. In India tax revenue, real interest rate and M2 negatively influence leverage whereas incomes taxes and public debt positively influences leverage.