Monetary Policy and Corporate Liquid Asset Demand

Woon Gyu Choi and Yungsan Kim

No 2001/177, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; monetary policy; rate of return; liquid asset demand; loan commitments; panel data; liquid asset holding; loan rate; market rate; commitment channel; opportunity cost; assets ratio rise; cash reserves; Loans; Liquidity; Bank credit; Demand for money; Currencies (search for similar items in EconPapers)
Pages: 41
Date: 2001-11-01
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Citations: View citations in EconPapers (7)

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