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Monetary Policy, External Finance and Investment

Author

Listed:
  • James Cloyne

    (University of California Davis/NBER/CEPR)

  • Clodomiro Ferreira

    (Bank of Spain)

  • Maren Froemel

    (Bank of England)

  • Paolo Surico

    (London Business School/CEPR)

Abstract

In response to a change in interest rates, younger firms not paying dividends adjust both their capital expenditure and borrowing significantly more than older firms paying dividends. The reason is that the debt of younger non-dividend payers is far more sensitive to fluctuations in collateral values, which are significantly affected by monetary policy. The results are robust to a wide range of possible confounding factors. Other channels, including movements in interest payments, product demand, profitability and mark-ups, are also significant but seem unlikely to explain the heterogeneity in the response of capital expenditure. Our findings suggest that financial frictions play a significant role in the transmission of monetary policy to investment.

Suggested Citation

  • James Cloyne & Clodomiro Ferreira & Maren Froemel & Paolo Surico, 2021. "Monetary Policy, External Finance and Investment," Working Papers 92, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:92
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    File URL: https://rednie.eco.unc.edu.ar/files/DT/92.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    monetary policy; investment; firm’s debt; collateral; financial frictions;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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