Hutchins Roundup: Monetary policy affects corporate investment, intergenerational education mobility, and more

Jeffrey Cheng,
Jeffrey Cheng - Research Analyst, Hutchins Center
Jeffrey Cheng Former Research Analyst - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
Finn Schüle, and
Finn Schuele - Senior Research Assistant
Finn Schüle PhD candidate - Brown University, Former Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
Louise Sheiner

December 20, 2018

Studies in this week’s Hutchins Roundup find that young firms’ investments are more responsive to monetary policy, progress in intergenerational educational mobility has been uneven, and more.

Studies in this week’s Hutchins Roundup find that young firms’ investments are more responsive to monetary policy, progress in intergenerational educational mobility has been uneven, and more.

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Monetary policy can influence corporate investment by changing asset values

Aggregate investment and credit conditions are sensitive to changes in monetary policy, but evidence on the channels through which these effects occur is limited. Using nearly 30 years of detailed firm-level data for publicly held firms in the United States and United Kingdom, James Cloyne of the University of California, Davis, and coauthors find that an unanticipated 0.25 percentage point increase in the interest rate leads non-dividend-paying firms less than 15 years old to reduce their investment by 1 percent in the U.S. and 2 percent in the U.K. within 3 years. In contrast, middle-aged and older firms reduce their investment by only 0.25 percent. The key difference is how a firm funds itself. Younger firms are more exposed to asset price fluctuations because their borrowing is constrained by the value of their collateral. So changes in monetary policy that affect asset values have large effects on access to financing. In contrast, older firms rely on diverse funding sources so their investment decisions are less affected by fluctuations in asset prices. The authors find that younger non-dividend paying firms account for more than 75 percent of the overall dynamic effects of monetary policy on aggregate investment.

Uneven progress in intergenerational education mobility

Education is an important driver of intergenerational mobility: Children who get more education than their parents tend to earn more as adults than their parents did. Using National Center of Education and Statistics data and detailed metropolitan-level data, Jason Fletcher of the University of Wisconsin-Madison and Joel Han of Loyola University Chicago compare the educational attainment of U.S. high school graduates in 1982, 1992, and 2004 to those of their parents. They find that intergenerational educational mobility—the extent to which children’s education is independent of their parents’ education—fell significantly from 1982 to 1992, then rose between 1992 and 2004. On net, educational mobility rose slightly over the entire period. The authors find substantial geographic variation in education mobility: Mobility increased strongly in the Western U.S., increased a bit in the North and Northeast, but fell in the South. In addition, they found that educational mobility improved least in racially segregated cities and states with high school exit exams.

Employees are more entrepreneurial at corporations with high R&D investment

Using U.S. Census data from 1990 to 2008, Tania Babina of Columbia Business School and Sabrina Howell of NYU Stern School of Business find that a doubling of a firm’s research and development spending increases the number of employees who leave to become entrepreneurs by 8.4 percent. One reason employees form start-ups rather than remaining with the parent firm is that risky ventures are often more successful when they are run as separate entities, which benefit from being highly focused and externally financed. Another reason is that parent firms may not wish to keep assets, intellectual or physical, that are not complementary to the core focus of the firm. The authors conclude that new firm creation is an unintended spillover of corporate R&D investment that generates positive social value from new jobs and the commercialization of new ideas.

Chart of the week: US financial conditions have tightened since the beginning of the year

finindexQuote of the week:

“Political considerations play no role whatsoever in our discussions or decisions about monetary policy. We’re always going to be focused on the mission that Congress has given us,” said Jerome Powell, chairman of the Federal Reserve Board.

“We have the tools to carry it out, we have the independence that we think is essential to be able to do our jobs in a nonpolitical way. We at the Fed are absolutely committed to that mission, and nothing will deter us from doing what we think is the right thing to do.”