Do firms react to monetary policy in developing countries?

European Economic Review

Djeneba Dramé () and Florian Léon ()
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Djeneba Dramé: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, UPN - Université Paris Nanterre
Florian Léon: FERDI - Fondation pour les Etudes et Recherches sur le Développement International, CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne

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Abstract: This paper examines how firms in developing countries respond to monetary policy changes, focusing on both their perceptions of credit constraints and their borrowing behavior. Using firm-level data from the World Bank Enterprise Surveys (WBES) and a newly constructed database of monetary policy changes, we employ an event study approach to analyze how managers adjust their expectations of credit access in the days following a policy intervention. We complement this with a broader analysis of how annual policy rate changes affect firms' credit applications. Our results show that firms perceive credit access as more restrictive after a policy rate hike, but do not significantly reduce their credit applications. Instead, credit demand increases after a rate cut, highlighting an asymmetric response to monetary policy. We also find substantial heterogeneity, with firms' sensitivity depending not only on their proximity to banks, but also on the degree of liquidity of the banking market and the degree of independence of the central bank. These results provide new insights into the transmission of monetary policy in developing countries.

Keywords: JEL; classification:; D4; E52; G32; L1; O16; Monetary; policy; Financial; constraints; Firms; Developing; countries (search for similar items in EconPapers)
Date: 2025-09
Note: View the original document on HAL open archive server: https://hal.science/hal-05172185v1
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Published in European Economic Review, 2025, 178, pp.105102. ⟨10.1016/j.euroecorev.2025.105102⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05172185

DOI: 10.1016/j.euroecorev.2025.105102

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