Is the Working Capital Channel of the Monetary Policy Quantitatively Relevant? A Structural Estimation Approach
33 Pages Posted: 30 Mar 2021 Last revised: 31 Mar 2021
Date Written: February 7, 2021
How big is the working capital channel? To answer this question, I estimate a dynamic model of investment with a working capital channel. I study this question for all firms listed in Compustat and for seven industries. For all the sample, I find that the working capital channel is not full as commonly is assumed in macroeconomic models, but it is still quantitatively important since its estimated value is 0.76. Analysis by industry suggests that the Retail Trade sector has the lowest working capital channel (0.48), the biggest sector in terms of number of firms -Manufacturing- has a strong one (0.7), and Agriculture and Construction sectors have a full working capital channel (1). These results provide microeconomic evidence on the quantitative relevance of working capital channel with a potential effect on macroeconomic models and monetary policy.
Keywords: Working capital channel, monetary policy, structural estimation
JEL Classification: E43, G32, C18
Suggested Citation: Suggested Citation