Firm Balance Sheet Liquidity, Monetary Policy Shocks, and Investment Dynamics

Priit Jeenas

No 1409, Working Papers from Barcelona School of Economics

Abstract: I study the role of firms' balance sheet liquidity in the transmission of monetary policy to investment. I develop a heterogeneous firm macroeconomic model with financial constraints, debt issuance costs, and differential returns on firms' cash and borrowing. The model matches key novel moments from U.S. firm-level data on liquid asset holdings, debt issuance activity, and investment responses to identified monetary shocks. Counterfactual analysis shows that the rise in U.S. firms' liquid asset holdings over recent decades has significantly increased the relevance of balance sheet liquidity and the behavior of liquid asset returns in monetary transmission.

Keywords: financial frictions; firm heterogeneity; investment; monetary policy (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 E52 G31 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Working Paper: Firm balance sheet liquidity, monetary policy shocks, and investment dynamics (2023)
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