Do firms react to monetary policy in developing countries?

Djeneba Dramé and Florian Léon

European Economic Review, 2025, vol. 178, issue C

Abstract: This paper examines how firms in developing countries respond to monetary policy changes, focusing on both their perceptions of credit constraints and their borrowing behavior. Using firm-level data from the World Bank Enterprise Surveys (WBES) and a newly constructed database of monetary policy changes, we employ an event study approach to analyze how managers adjust their expectations of credit access in the days following a policy intervention. We complement this with a broader analysis of how annual policy rate changes affect firms’ credit applications. Our results show that firms perceive credit access as more restrictive after a policy rate hike, but do not significantly reduce their credit applications. Instead, credit demand increases after a rate cut, highlighting an asymmetric response to monetary policy. We also find substantial heterogeneity, with firms’ sensitivity depending not only on their proximity to banks, but also on the degree of liquidity of the banking market and the degree of independence of the central bank. These results provide new insights into the transmission of monetary policy in developing countries.

Keywords: Monetary policy; Financial constraints; Firms; Developing countries (search for similar items in EconPapers)
JEL-codes: D4 E52 G32 L1 O16 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:178:y:2025:i:c:s0014292125001527

DOI: 10.1016/j.euroecorev.2025.105102

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