Does money supply shape corporate capital structure? International evidence from a panel data analysis

We investigate how the growth rate of money supply, as a key dimension of the monetary policy, affects corporate debt decisions using a broad sample of companies from developed and emerging economies. Although expansionary measures increase market liquidity and encourage the use of debt, our results show that there is an optimal level of money supply beyond which additional liquidity discourages firms from using debt. However, the intensity of the effect of money growth on debt and the level of liquidity at which firms’ access to debt financing is maximized depends on the characteristics of the banking system. The effect is mitigated in countries where banks hold a higher fraction of liquid assets. By contrast, the relation between money supply and corporate leverage is more pronounced when a higher proportion of banks’ resources are allocated to private credit.