Banking Structure and Monetary Policy Transmission: Evidence from Firm-Level Investment

81 Pages Posted: 23 Mar 2017 Last revised: 27 Sep 2018

See all articles by Alex Hsu

Alex Hsu

Georgia Institute of Technology - Scheller College of Business

Date Written: March 20, 2017

Abstract

We find a significant increase in sensitivities of firm-level investment to monetary policy changes after interstate banking deregulation (IBD) in the U.S. The sensitivities are on average 2% more negative in the years following IBD compared to prior. The intensification of monetary policy potency is through the balance sheet channel of transmission. The result is driven entirely by firms with low external financing premium, characterized by low book leverage and high book-to-market ratio. Consistent with our empirical finding, when the financial accelerator is turned on in a calibrated DSGE model, the investment response to monetary policy shocks is amplified.

Keywords: Banking Deregulation, Investment, Monetary Policy Transmission, Financial Accelerator

JEL Classification: E44, E52, G21, G31

Suggested Citation

Hsu, Alex, Banking Structure and Monetary Policy Transmission: Evidence from Firm-Level Investment (March 20, 2017). Georgia Tech Scheller College of Business Research Paper No. 17-12, Available at SSRN: https://ssrn.com/abstract=2937911 or http://dx.doi.org/10.2139/ssrn.2937911

Alex Hsu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

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