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Firm liquidity and the transmission of monetary policy

Margherita Bottero () and Stefano Schiaffi ()
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Margherita Bottero: Bank of Italy
Stefano Schiaffi: Bank of Italy

No 1378, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We study how firms’ cash balances affect the supply of bank credit and the transmission of monetary policy via the bank-lending channel in Italy using bank- and firm-level data. From a theoretical perspective, there is no agreement on whether, for a given level of credit demand, cash-rich companies enjoy better access to credit, as an abundance of cash may reveal both positive and negative information about the firm. According to our analysis, based on a sample of 430,000 Italian non-financial corporations over the period 2006-2018, banks view firm liquidity favourably since it is associated, on average, with cheaper bank funding and with a credit composition tilted towards term loans, at all maturities and non-collateralized. We also show that firms reallocate their liquidity in and out of their deposits following changes in the slope of the yield curve, which proxies the opportunity cost of cash. For this reason, changes in monetary policy that alter the slope of the term structure impact the cost of credit not only via the traditional channels but also indirectly, as they prompt a reallocation of firm liquidity that banks anticipate and price into the credit contracts they offer.

Keywords: firm liquidity; bank financing; monetary policy transmission (search for similar items in EconPapers)
JEL-codes: E51 E52 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-eec, nep-eur and nep-mon
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