Monetary Policy, Corporate Finance and Investment
78 Pages Posted: 29 Mar 2019 Last revised: 17 Jul 2019
Date Written: March 28, 2019
We provide new evidence on how monetary policy affects investment and firm finance in the United States and the United Kingdom. Younger firms paying no dividends exhibit the largest and most significant change in capital expenditure – even after conditioning on size, asset growth, Tobin’s Q, leverage or liquidity – and drive the response of aggregate investment. Older companies, in contrast, hardly react at all. After a monetary policy tightening, net worth falls considerably for all firms but borrowing declines only for younger non-dividend payers, as their external finance is mostly exposed to asset value fluctuations. Conversely, cash-flows change less markedly and more homogeneously across groups. Our findings highlight the role of firm finance and financial frictions in amplifying the effects of monetary policy on investment.
Keywords: monetary policy, financial frictions, firm finance, investment
JEL Classification: E22, E32, E52
Suggested Citation: Suggested Citation