How Does Monetary Policy Affect Prices of Corporate Loans?

Seung Kwak
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Seung Kwak: https://www.federalreserve.gov/econres/seung-kwak.htm

No 2022-008, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the impact of unanticipated monetary policy news around FOMC announcements on secondary market corporate loan spreads. We find that the reaction of loan spreads to monetary policy news is weaker than that of bond spreads: following an unanticipated monetary policy tightening (easing) shock, loan spreads do not increase (decrease) as much as bond spreads do. Decomposition of the spreads into compensations for expected defaults and risk premiums shows that differential reactions of loan and bond risk premiums are the main driver of the differential spread reactions. We further find that the weaker loan spread reactions to monetary policy shocks are more pronounced for riskier loans. Lastly, reactions of primary market loan spreads to monetary policy shocks are also muted. These findings highlight heterogeneous impacts of monetary policy across different types of corporate credit markets, possibly reflecting heterogeneous investor demand responses to monetary policy in those markets.

Keywords: Corporate bonds; Monetary policy; Corporate loans (search for similar items in EconPapers)
JEL-codes: E52 G12 G23 (search for similar items in EconPapers)
Pages: 95 p.
Date: 2022-02-25
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2022-08

DOI: 10.17016/FEDS.2022.008

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