This paper examines the role of firms’ operating cash flows for the transmission of monetary policy. Using supplier-customer data for public US firms, I find that delayed payments for intermediate inputs in supply chains weaken suppliers’ investment response to monetary policy shocks, with the effect significant up to ten quarters. I rationalise these findings using a heterogeneous firm New Keynesian model where delayed payments adversely affect suppliers’ cash flows. In the presence of financial frictions, lower cash flows constrain the ability of affected suppliers to borrow and finance investment. As evidence for this mechanism, I use firm balance sheet and loan-level data to show that suppliers exposed to delayed payments face tighter borrowing constraints. Moreover, exposure to delayed payments dampens the response of suppliers’ cash flows and borrowing to monetary policy shocks, consistent with the proposed mechanism. Calibrating the model to match relevant data, I show that the framework can replicate the magnitude and persistence of heterogeneity in investment response to monetary policy. Finally, I use the model to simulate the steep deterioration in payment behaviour during COVID-19 and find that the response of aggregate investment to a monetary policy shock is 17% weaker than it would be in the absence of delayed payments, highlighting the quantitative relevance of the proposed channel.

We provide evidence that the deposit franchise of privately owned banks is driven by their deposit market concentration while state owned banks derive their franchise value from government guarantees. Using the boom period of the 2000s in India as a laboratory, when monetary policy tightened precipitously, we document that banks with stronger deposit franchises significantly increased exposure to the infrastructure sector, at the expense of investing in marked-to-market government securities. Subsequently, these banks have higher non-performing loans. This highlights an important trade-off between mark-to-market and default risk for banks, particularly in economies with incomplete asset markets and significant state guarantees for banking assets.

This paper studies the relevance of bureaucrats in businesses on the allocation of finance across firms. Using a novel firm-level database containing information about the ownership structure of firms operating in 24 European countries during the period 2010-2016, we show that firms with public authorities as direct shareholders get subsidised access to financial resources compared to private-owned enterprises. A 1 percentage point increase in government direct shareholding reduces the average cost of production through the financial channel by 0.02 percent. Back-of-the-envelope calculations show that the fiscal burden of the SOE financial subsidy ranges from 0.001% to 0.955% of GDP. Counterfactual analyses conducted to quantify the aggregate productivity gains from removing state-ownership distortions show that a reform reallocating resources from unproductive state-owned enterprises towards more productive firms can yield productivity gains ranging from 19.1% to 83.7%.

Financial market imperfections are a key determinant of the large differences in aggregate productivity across countries. This study leverages a novel methodology proposed by Whited and Zhou (2021) to measure the allocative efficiency of financial liabilities across firms and applies it to a database of 25 European countries. It finds a strong negative correlation between finance misallocation and economic development, with the productivity gains from achieving the efficient allocation ranging between 40% and 80%. Inspecting the distribution of financing costs, the paper shows these to be lower at older and larger firms than younger and smaller ones. The paper also quantifies the association between financial misallocation and real-input allocative inefficiency. It finds that a decrease in finance misallocation from the median to the 25th percentile of the cross-industry distribution increases aggregate productivity by 7.1% on average and by 8.2% in industries with high external finance dependence.