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Do firms react to monetary policy in developing countries?
[European Economic Review]

Author

Listed:
  • Djeneba Dramé

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, UPN - Université Paris Nanterre)

  • Florian Léon

    (FERDI - Fondation pour les Etudes et Recherches sur le Développement International, CERDI - Centre d'Études et de Recherches sur le Développement International - IRD - Institut de Recherche pour le Développement - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)

Abstract

This paper examines how firms in developing countries respond to monetary policy changes, focusing on both their perceptions of credit constraints and their borrowing behavior. Using firm-level data from the World Bank Enterprise Surveys (WBES) and a newly constructed database of monetary policy changes, we employ an event study approach to analyze how managers adjust their expectations of credit access in the days following a policy intervention. We complement this with a broader analysis of how annual policy rate changes affect firms' credit applications. Our results show that firms perceive credit access as more restrictive after a policy rate hike, but do not significantly reduce their credit applications. Instead, credit demand increases after a rate cut, highlighting an asymmetric response to monetary policy. We also find substantial heterogeneity, with firms' sensitivity depending not only on their proximity to banks, but also on the degree of liquidity of the banking market and the degree of independence of the central bank. These results provide new insights into the transmission of monetary policy in developing countries.

Suggested Citation

  • Djeneba Dramé & Florian Léon, 2025. "Do firms react to monetary policy in developing countries? [European Economic Review]," Post-Print hal-05172185, HAL.
    • Handle: RePEc:hal:journl:hal-05172185
    DOI: 10.1016/j.euroecorev.2025.105102
    Note: View the original document on HAL open archive server: https://hal.science/hal-05172185v1
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    Keywords

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    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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