The impact of monetary policy on corporate financial decisions: A study of the European markets

Download This Article

This work is licensed under a Creative Commons Attribution 4.0 International License.

Abstract

In the modern global dynamics, monetary policy has become one of the most integral tools of world governments to tackle economic shocks. The interest rate policy is one of the most integral instruments available as a monetary policy to the governments (Jordà et al. 2024). A change in the interest rates can help to tackle the inflationary pressures by reducing the circulation of money in the nation. However, changes in interest also impact the borrowing cost in the economy (Kempa et al. 2021). This prevents investment and consumption activities in the nation. However, the same also impacts the corporate decision-making on loans for firms in an economy. The study uses data from 1586 listed companies across France and Germany. From the 4210 observations across Europe, a panel data regression model using fixed effects model (FEM) and random effects model (REM) is used to analyze the impact of monetary policy on debt levels. The results show that interest rates impact the total debt of companies in Europe significantly. Furthermore, economic growth and market capitalization also impact the total debt of firms in Europe significantly. Overall, the monetary policy has a significant impact on the corporate financial decisions in Europe.

Keywords: Interest Rate, Fixed-Effects Model, GDP Growth Rate, Debt-to-Equity Ratio, Market Capitalisation, Long-Term Debt

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: C23, E52, E31, F36, G32

Received: 07.03.2025
Revised: 25.06.2025; 04.12.2025
Accepted: 30.12.2025
Published online: 02.01.2026

How to cite this paper: Wang, H. (2026). The impact of monetary policy on corporate financial decisions: A study of the European markets. Journal of Governance & Regulation, 15(1), 20–29. https://doi.org/10.22495/jgrv15i1art2