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Firms’ Cash Holdings and Monetary Policy Transmission

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Abstract

Liquidity, particularly cash holdings, may serve as an important cushion for firms to absorb macroeconomic shocks such as interest rate increases so that these shocks have only minimal effects on their operations, at least in the short term. For example, to finance their investments, firms with high levels of cash may not have to tap so deep into debt financing, the cost of which relates closely to interest rates. Understanding the role of corporate cash holdings is therefore paramount to formulating appropriate monetary policy in the current environment. This brief informs the ongoing policy debate by examining the effect of US nonfinancial corporate cash holdings on the transmission of monetary policy, both historically and in the present tightening cycle. This brief shows that in the current hiking cycle, firms have used the cash they accumulated in 2020 and 2021 to finance operations, growth, and payouts. Due to this depletion of the accumulated-cash buffer, the effects of interest rate increases to date on corporate investment will likely gain traction in the coming quarters.

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  • Falk Bräuning & José Fillat & Gustavo Joaquim, 2023. "Firms’ Cash Holdings and Monetary Policy Transmission," Current Policy Perspectives 97115, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbcq:97115
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    References listed on IDEAS

    as
    1. Swanson, Eric T., 2021. "Measuring the effects of federal reserve forward guidance and asset purchases on financial markets," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 32-53.
    2. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
    3. José Luis Montiel Olea & Mikkel Plagborg‐Møller, 2021. "Local Projection Inference Is Simpler and More Robust Than You Think," Econometrica, Econometric Society, vol. 89(4), pages 1789-1823, July.
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    More about this item

    Keywords

    monetary policy transmission; cash accumulation; investment;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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