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The Effect of Firm Cash Holdings on Monetary Policy

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  • Bernardino Adão
  • André C. Silva

Abstract

Firm cash holdings increased substantially from 1980 to 2013. The overall distribution of firm cash holdings changed in the same period. We study the implications of these changes for monetary policy. We use Compustat data and a model with financial frictions that allows the calculation of the monetary policy effects according to the distribution of cash holdings. We find that the interest rate channel of the transmission of monetary policy has become more powerful, as the impact of monetary policy over real interest rates increased. With the observed changes in firm cash holdings, the real interest rate takes 3.4 months more to return to its initial value after a shock to the nominal interest rate.

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  • Bernardino Adão & André C. Silva, 2018. "The Effect of Firm Cash Holdings on Monetary Policy," Working Papers w201804, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201804
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    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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