Corporate finance, monetary policy, and aggregate demand

Mario Rafael Silva

Journal of Economic Dynamics and Control, 2019, vol. 102, issue C, 1-28

Abstract: I study how heterogeneity of financial frictions and monopolistic competition influence the pass through of the nominal interest rate to the real lending rate, its transmission into investment, and corporate cash holdings. Firms finance stochastic investment opportunities with either bank-issued credit or money. The market structure generates an aggregate demand externality which doubles transmission at the a policy rate of 4.8% and magnifies the effects of financial frictions on investment. In line with empirical evidence, the cash-to-sales ratio increases with the extent of financial constraints, and rises with the intensity of competition for financially constrained firms. Financial constraints raise firms’ sensitivity to monetary policy; and a mean-preserving spread of financial frictions reduces investment and output, strengthens transmission, and reduces the external share of finance.

Keywords: Corporate finance; Monetary policy; Heterogeneity; Monopolistic competition; Cash holdings (search for similar items in EconPapers)
JEL-codes: D83 E32 E51 G21 L11 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:102:y:2019:i:c:p:1-28

DOI: 10.1016/j.jedc.2019.03.001

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