Monetary Policy and Corporate Liquid Asset Demand

November 1, 2001

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Format: Chicago

Woon Gyu Choi, and Yungsan Kim. Monetary Policy and Corporate Liquid Asset Demand, (USA: International Monetary Fund, 2001) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset and liability management, Bank credit, Currencies, Demand for money, Financial institutions, Liquidity, Loans, Money

Keywords: Assets ratio rise, Bank credit, Cash reserves, Commitment channel, Currencies, Demand for money, Liquid asset demand, Liquid asset holding, Liquidity, Loan commitments, Loan rate, Loans, Market rate, Monetary policy, Opportunity cost, Panel data, Rate of return, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/177
Stock No:

WPIEA1772001
ISBN:

9781451858877
ISSN:

1018-5941

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