Journal of Political Economy· 2026Q1
Firm Balance Sheet Liquidity, Monetary Policy Shocks, and Investment Dynamics
- 0citations
- Q1SCImago
- 2026year
Short summary
Firms' increasing holdings of liquid assets have amplified the impact of monetary policy on their investment decisions.
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Key points
- Firms' liquid asset holdings have become more important in how monetary policy affects investment.
- A new macroeconomic model incorporates financial constraints, debt costs, and differential returns on cash vs. borrowing.
- The model successfully matches U.S. firm-level data on liquid assets, debt issuance, and investment responses to monetary shocks.
- Counterfactual analysis shows increased relevance of balance sheet liquidity and liquid asset returns in monetary transmission due to rising liquid asset holdings.
AI-generated from the title and abstract; the full text is not read.
Abstract
I study the role of firms' balance sheet liquidity in the transmission of monetary policy to investment. I develop a heterogeneous firm macroeconomic model with financial constraints, debt issuance costs, and differential returns on firms' cash and borrowing. The model matches key novel moments from U.S. firm-level data on liquid asset holdings, debt issuance activity, and investment responses to identified monetary shocks. Counterfactual analysis shows that the rise in U.S. firms' liquid asset holdings over recent decades has significantly increased the relevance of balance sheet liquidity and the behavior of liquid asset returns in monetary transmission.
The authors' abstract, as published at the source. Journal of Political Economy, 2026 · DOI ↗
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FinanceEconomics, Econometrics and Finance