Monetary Policy, External Finance and Investment

James Cloyne, Clodomiro Ferreira, Maren Froemel and Paolo Surico
Additional contact information
Clodomiro Ferreira: Bank of Spain
Maren Froemel: Bank of England

No 92, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that financial frictions play a significant role in the transmission of monetary policy to investment.

Keywords: monetary policy; investment; firm’s debt; collateral; financial frictions (search for similar items in EconPapers)
JEL-codes: E22 E32 E52 (search for similar items in EconPapers)
Pages: 88 pages
Date: 2021-11
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-cwa, nep-fdg, nep-mac, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:92

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