Liquidity constraints and the balance sheet channel of monetary policy transmission
Liquidity constraints and the balance sheet channel of monetary policy transmission

Summary/Abstract: The balance sheet channel used to be perceived as a minor channel of monetary policy transmission but has become important since the interest rates faced the zero lower bound. This paper analyzes monetary policy impact on the relation between liquidity and fixed asset investments of the US non-financial companies in the decade between 2005 and 2014. Two hypotheses were proposed: 1) tight monetary policy limited companies’ access to liquidity, and 2) quantitative easing influenced the level of fixed asset investment. Three random effects and three fixed effects models were constructed for each hypothesis, controlling for size and the level of financial leverage. It was found that, firstly, relative tightening of monetary policy seemed unrelated to liquidity constraints. A company’s size and its debt-to-equity ratio determined its ability to raise external funds. Secondly, the validity of the balance sheet channel could not be dismissed when considering unconventional monetary policy. The results corroborated the existence of a positive correlation between the liquid asset ratio and fi xed asset investments.

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