Financial intermediary leverage and monetary policy transmission

Zehao Li

European Economic Review, 2022, vol. 144, issue C

Abstract: Monetary policy is more effective when financial intermediaries have a higher equity share in their total assets. When the leverage ratio is one standard deviation below average, the marginal effect of a monetary policy shock on realized S&P 500 returns is 89% larger in an event window study. In a VAR exercise, the impulse responses of real variables to a given monetary policy shock also have larger magnitudes when financial intermediaries have a lower leverage. The financial intermediary leverage is counter-cyclical, explaining why monetary policy is less effective during recessions as found in the literature.

Keywords: Monetary policy transmission; Intermediary asset pricing; Nonlinear VAR (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:144:y:2022:i:c:s0014292122000332

DOI: 10.1016/j.euroecorev.2022.104080

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