Increased strength of monetary policy

Bernardino Adão, André Castro Silva

Research output: Contribution to journalArticlepeer-review

Abstract

Firms cash holdings distribution changed substantially from 1980 to 2013. We study the effects of this change in the formulation of monetary policy using a model with financial segmentation. We find that the interest rate channel of the transmission mechanism of monetary policy has become more powerful, as the impact of monetary policy over the real interest rate increased. Now, with the increase in firm cash holdings, the real interest rate takes 3.4 months more to return to its initial value after a shock to the nominal interest rate.
Original languageEnglish
Pages (from-to)3-20
Number of pages18
JournalBanco de Portugal Economic Studies
Volume1
Issue number2
Publication statusPublished - 2015

Keywords

  • financial frictions,firm cash holdings,interest rates,liquidity effect,market segmentation,monetary policy

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