Do Companies’ Cash Holdings Impact the Transmission of Economic Policy Uncertainty Shocks to Capital Formation?
Evidence shows that positive (negative) economic policy uncertainty raises (reduces) growth of companies’ deposits. Increases in the growth of companies’ deposits accentuate the decline in capital formation following a positive economic policy uncertainty shock. The decline is large when inflation exceeds the 6 % threshold than below this limit. The reduction in the growth of companies’ deposits in the low inflation regime amplifies the increase in capital formation following a negative economic policy uncertainty shock. From a policy perspective, price stability matters as the low inflation environment makes the growth of companies’ deposits to cushion the decline in the capital formation growth due to positive economic policy uncertainty shocks.
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