The Effect of Firm Cash Holdings on Monetary Policy

46 Pages Posted: 26 Jul 2015 Last revised: 8 Jun 2020

See all articles by Bernardino Adao

Bernardino Adao

Bank of Portugal - Research Department

Andre C. Silva

Nova School of Business and Economics

Date Written: June 1, 2020

Abstract

Firm cash holdings increased substantially from 1980 to 2017. We study the implications of the increase in firm cash holdings on monetary policy. We introduce a model that takes the distribution of firm cash holdings as an input. We find that the interest rate channel of the transmission of monetary policy becomes more powerful, as the impact of monetary policy over real interest rates increases. The time for the real interest rate to return to its initial value increases three times. Given the current large firm cash holdings, our results imply that monetary policy changes should be made gradually.

Keywords: firm cash holdings, interest rates, financial frictions, liquidity effect, monetary policy

JEL Classification: E40, E50, G12, G31

Suggested Citation

Adao, Bernardino and Silva, Andre C., The Effect of Firm Cash Holdings on Monetary Policy (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=2635727 or http://dx.doi.org/10.2139/ssrn.2635727

Bernardino Adao

Bank of Portugal - Research Department ( email )

Av. Almirante Reis 71, 6th
Lisbon 1150-012
Portugal

Andre C. Silva (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Carcavelos, 2775-405
Portugal

HOME PAGE: http://sites.google.com/view/andredecastrosilva

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