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The real effect of monetary policy under uncertainty: Evidence from the change in corporate financing purposes

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  • Lu, Jiajun
  • Lv, Linying
  • Wang, Yizhong
  • Zhu, Yueteng

Abstract

This paper introduces the “financing purposes (FP) channel”, a new channel through which uncertainty affects the effectiveness of monetary policy. Using U.S. bank-firm-loan-level data from 1990 to 2019, we examine how firms adjust FP in response to monetary policy shocks and how this response varies with the level of macroeconomic uncertainty. We find that firms demand more bank loans for investment-related purposes during monetary expansion, but this tendency diminishes notably when uncertainty spikes. A counterfactual analysis suggests that heightened uncertainty explains almost half of the decline in the share of productive loans during the Great Recession. Our results are not driven by banks’ credit supply and are more pronounced for more financially constrained firms and those with a higher degree of investment irreversibility, aligning with the real options theory and financial frictions channel. We also show that FP positively predicts real activities such as investment and employment growth, indicating that high uncertainty weakens the monetary policy transmission via the financing purposes channel.

Suggested Citation

  • Lu, Jiajun & Lv, Linying & Wang, Yizhong & Zhu, Yueteng, 2025. "The real effect of monetary policy under uncertainty: Evidence from the change in corporate financing purposes," Journal of Banking & Finance, Elsevier, vol. 172(C).
  • Handle: RePEc:eee:jbfina:v:172:y:2025:i:c:s0378426625000020
    DOI: 10.1016/j.jbankfin.2025.107381
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    More about this item

    Keywords

    Monetary policy; Macroeconomic uncertainty; Financing purpose; Credit demand; Financial friction; Real options theory;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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