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Firm Balance Sheet Liquidity, Monetary Policy Shocks, and Investment Dynamics

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  • Priit Jeenas

Abstract

I study the role of firms' balance sheet liquidity in the transmission of monetary policy to investment. In response to monetary contractions, U.S. firms with fewer liquid asset holdings reduce investment relatively more. This can be explained by their higher likelihood to issue debt and the implied exposure to borrowing cost fluctuations. I rationalize these results using a heterogeneous firm macroeconomic model with financial constraints, debt issuance costs, and differential returns on cash and borrowing. Compared to a framework which ignores liquidity considerations, monetary transmission to aggregate investment is slightly dampened and depends on liquid asset portfolios beyond net worth.

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  • Priit Jeenas, 2023. "Firm Balance Sheet Liquidity, Monetary Policy Shocks, and Investment Dynamics," Working Papers 1409, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1409
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