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Monetary Policy and Corporate Liquid Asset Demand

  • Woon Gyu Choi
  • Yungsan Kim

In contrast to conventional money demand literature, this paper proposes that monetary policy affects corporate liquidity demand directly through a separate channel-what we call "the loan commitment channel." Upon persistent monetary policy shocks, firms make substitutions between sources of funds for intertemporal liquidity management, taking advantage of loan commitments and sluggish movements in loan rates. To test this proposition, we estimate corporate liquidity demand, controlling for firm characteristics, using U.S. quarterly panel data. The results indicate that when monetary policy is tightened, S&P 500 firms initially increase their liquid assets before reducing them, whereas non-S&P firms reduce them more quickly.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/177.

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Length: 41
Date of creation: 01 Nov 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/177
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