On mergers, monetary policy and output durability

This article examines the causal relation between monetary policy decisions and the variation in the US mergers and acquisitions (M&A) activity in the durable and nondurable goods sectors between 1990 and 2013. The deviation of the monetary policy-set federal funds rate from the natural interest rate estimated by Laubach and Williams (2003) is shown to have significant causal effects on the M&A activity. In the nondurable goods sector, the funds rate’s deviation from the natural rate, rather than the funds rate itself, is the main macroeconomic factor influencing the M&A activity. In the durable goods sector, the variation in the funds rate, only when this rate is significantly below the natural one, is the main macroeconomic factor influencing the M&A activity. Setting the funds rate below the natural rate reflecting long-term fundamentals (a) leads to relatively lower financing costs which, in turn, lead companies to favour M&A relative to internal growth and (b) makes the M&A activity in the durable goods sector, which is sensitive to the variation in the cost of capital, highly dependent on the monetary policy-set rate.