Banking Structure and Monetary Policy Transmission: Evidence from Firm-Level Investment
81 Pages Posted: 23 Mar 2017 Last revised: 27 Sep 2018
Date Written: March 20, 2017
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: Suggested Citation