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Corporate finance, monetary policy, and aggregate demand

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  • Silva, Mario Rafael

Abstract

I study how heterogeneity of financial frictions and monopolistic competition influence the pass through of the nominal interest rate to the real lending rate, its transmission into investment, and corporate cash holdings. Firms finance stochastic investment opportunities with either bank-issued credit or money. The market structure generates an aggregate demand externality which doubles transmission at the a policy rate of 4.8% and magnifies the effects of financial frictions on investment. In line with empirical evidence, the cash-to-sales ratio increases with the extent of financial constraints, and rises with the intensity of competition for financially constrained firms. Financial constraints raise firms’ sensitivity to monetary policy; and a mean-preserving spread of financial frictions reduces investment and output, strengthens transmission, and reduces the external share of finance.

Suggested Citation

  • Silva, Mario Rafael, 2019. "Corporate finance, monetary policy, and aggregate demand," Journal of Economic Dynamics and Control, Elsevier, vol. 102(C), pages 1-28.
    • Handle: RePEc:eee:dyncon:v:102:y:2019:i:c:p:1-28
    DOI: 10.1016/j.jedc.2019.03.001
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    More about this item

    Keywords

    Corporate finance; Monetary policy; Heterogeneity; Monopolistic competition; Cash holdings;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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