Monetary Policy and Corporate Liquid Asset Demand
November 1, 2001
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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.
Subject: Asset and liability management, Bank credit, Currencies, Demand for money, Financial institutions, Liquidity, Loans, Money
Keywords: assets ratio rise, Bank credit, cash reserves, commitment channel, Currencies, Demand for money, liquid asset demand, liquid asset holding, Liquidity, loan commitments, loan rate, Loans, market rate, monetary policy, opportunity cost, panel data, rate of return, WP
Pages:
41
Volume:
2001
DOI:
Issue:
177
Series:
Working Paper No. 2001/177
Stock No:
WPIEA1772001
ISBN:
9781451858877
ISSN:
1018-5941
