The Effect of Corporate Cash Accumulation on Monetary Policy Transmission: A Stock-flow Consistent Growth Model

Nitin Nair

No PKWP2610, Working Papers from Post Keynesian Economics Society (PKES)

Abstract: This paper causally shows that non-financial corporate liquidity dampens monetary policy transmission. While standard analyses of financial heterogeneity rely on exposure-based esti- mates, I additionally employ Granular Instrumental Variables (GIV) to overcome endogeneity concerns. GIVs exploit idiosyncratic shocks to the largest corporate cash holding firms to identify exogenous variation in the aggregate cash ratio. I then develop a stock-flow consistent growth model to identify the structural conditions under which corporate cash accumulation weakens transmission. These results have direct implications for the effectiveness of monetary policy and motivate the inclusion of corporate liquidity into mechanisms like the financial accelerator and investment functions.

Keywords: Monetary Policy Transmission; Local Projections; Granular Instrument Variables; Corporate Finance; Stock–flow consistent model (search for similar items in EconPapers)
JEL-codes: C36 E12 E22 E52 G32 (search for similar items in EconPapers)
Pages: 23
Date: 2026-04
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mon and nep-pke
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