The authors examine how changes in monetary policy influence corporate investment by altering conditions in equity markets, such as stock prices and the cost of issuing new shares. They show that this “equity financing channel” can be an important transmission mechanism of monetary policy, complementing the traditional focus on bank lending and debt markets.
Key Takeaways:
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Monetary policy shocks affect firms’ equity issuance activity, which in turn influences how much they invest.
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Equity financing can explain a substantial share of the response of corporate investment to monetary policy, beyond what is captured by changes in debt or bank lending.
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Models and policy analyses that ignore equity issuance likely underestimate the strength and distribution of monetary policy’s real effects across firms.
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