Expansionary monetary policy and corporate investment in an emerging market

Abstract

Purpose

The purpose of this paper is to investigate the effect of monetary loosening on corporate investment in an emerging market.

Design/methodology/approach

The paper begins this study by using a dynamic model to investigate the effect of monetary loosening on corporate investment. This paper uses money supply growth as a proxy for monetary loosening, as the State Bank of Vietnam relies mainly on a quantity-based policy. Next, this paper continues to analyze whether cash holdings are able to mitigate this effect. Finally, this paper examines the effect of monetary loosening on investment smoothing and the mitigating role of cash holding. The research sample includes 4,868 from 617 firms. This paper uses different regression techniques (i.e. pooled ordinary least squares clustered by firm, fixed effects, random effects and system generalized method of moments).

Findings

The research findings show that money supply growth is positively related to both corporate investment and investment smoothing. The effect of monetary loosening on corporate investment is mitigated by corporate cash holding. Moreover, this paper finds that the mitigating effect of cash holdings is stronger for financially constrained firms and non-state-owned enterprises.

Originality/value

Prior studies only focus on corporate investment under-tightening monetary policy; however, there is no research on firm investment under monetary loosening in an emerging market.

Citation

Tran, Q.T. (2021), "Expansionary monetary policy and corporate investment in an emerging market", Journal of Financial Economic Policy, Vol. 13 No. 2, pp. 239-255. https://doi.org/10.1108/JFEP-03-2020-0055