Financial Constraints and the Response of Business Investment to Monetary Policy Shocks

• Main Author: Haase Timothy J.
• Format: Article
• Language: English
• Published: Sciendo 2016-09-01
• Series: Journal of Central Banking Theory and Practice
• Subjects: business investment; monetary policy; g31; e52
• Online Access: https://doi.org/10.1515/jcbtp-2016-0018

In this study I investigate what impact monetary policy shocks have on firms’ fixed investment, the less liquid portion of gross investment that requires more planning. I account for firms facing financial constraints firms by utilizing a common measure of asset size, which is used in previous literature. I use two exogenous, continuous series of monetary policy shocks to show that constrained firms have statistically different responses to policy than unconstrained firms. Specifically, I find that constrained firms’ fixed investment significantly responds more to monetary policy shocks than unconstrained firms.