Monetary Policy and Corporate Liquid Asset Demand

Author/Editor:

Woon Gyu Choi ; Yungsan Kim

Publication Date:

November 1, 2001

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

In contrast to conventional money demand literature, this paper proposes that monetary policy affects corporate liquidity demand directly through a separate channel-what we call "the loan commitment channel." Upon persistent monetary policy shocks, firms make substitutions between sources of funds for intertemporal liquidity management, taking advantage of loan commitments and sluggish movements in loan rates. To test this proposition, we estimate corporate liquidity demand, controlling for firm characteristics, using U.S. quarterly panel data. The results indicate that when monetary policy is tightened, S&P 500 firms initially increase their liquid assets before reducing them, whereas non-S&P firms reduce them more quickly.

Series:

Working Paper No. 2001/177

Subject:

Asset and liability management Bank credit Currencies Demand for money Financial institutions Liquidity Loans Money

English

Publication Date:

November 1, 2001

ISBN/ISSN:

9781451858877/1018-5941

Stock No:

WPIEA1772001

Pages:

41

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