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

Priit Jeenas

No 1409, Working Papers from Barcelona School of Economics

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.

Keywords: investment; monetary policy; financial frictions; firm heterogeneity (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 E52 G31 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Firm balance sheet liquidity, monetary policy shocks, and investment dynamics (2023)
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