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Firm Balance Sheet Liquidity, Monetary Policy Shocks, and Investment Dynamics

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  • Priit Jeenas
Abstract
I study the role of firms’ balance sheet liquidity in the transmission of monetary policy to investment. In response to monetary contractions, U.S. firms with fewer liquid asset holdings reduce investment relatively more. I analyze the mechanism, and rationalize the results using a heterogeneous firm macroeconomic model with financial constraints, debt issuance costs, and differential returns on cash and borrowing. In the calibrated model, the direct channel of monetary transmission is considerably weaker than in a canonical framework ignoring liquidity considerations. Also, liquidity notice- ably affects firms’ investment responses in partial equilibrium, yet general equilibrium effects dampen its influence on aggregates.

Suggested Citation

  • Priit Jeenas, 2023. "Firm Balance Sheet Liquidity, Monetary Policy Shocks, and Investment Dynamics," Working Papers 1409, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1409
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    2. Omer Majeed & Jonathan Hambur & Robert Breunig, 2024. "Do Monetary Policy and Economic Conditions Impact Innovation? Evidence from Australian Administrative Data," RBA Research Discussion Papers rdp2024-01, Reserve Bank of Australia.
    3. Gulnara Nolan & Jonathan Hambur & Philip Vermeulen, 2023. "Does Monetary Policy Affect Non-mining Business Investment in Australia? Evidence from BLADE," RBA Research Discussion Papers rdp2023-09, Reserve Bank of Australia.

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    More about this item

    Keywords

    monetary policy; investment; financial frictions; firm heterogeneity;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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