How does Monetary Policy Affect Business Investment? Evidence from Australia

Gulnara Nolan, Jonathan Hambur and Philip Vermeulen

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We use administrative and survey evidence from Australia to provide several new empirical facts about how monetary policy affect investment. First, we demonstrate that contractionary policy affects both the intensive and extensive margins of investment, with the latter particularly important for small and young firms, suggesting quadratic adjustment costs do not accurately capture firm-level dynamics. Second, we show that firms’ actual and expected investment respond at the same time. This suggests that models of myopia may be more realistic way of incorporating slow aggregate investment responses into models. It also suggests that the user cost channel may be less important than other channels, as user costs would adjust immediately following the policy change. Finally, we show that firms that claim to be financially constrained, a more direct measure of constraints than previously used in the literature, are more responsive to monetary policy, and that more most the difference comes through the extensive margin. Moreover, contractionary policy leads to an increase in the share of constrained firms.

Keywords: investment; monetary policy; financial constraints (search for similar items in EconPapers)
JEL-codes: E22 E52 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2025-02
New Economics Papers: this item is included in nep-cba, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-09

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