Financial Heterogeneity and the Investment Channel of Monetary Policy

Pablo Ottonello and Thomas Winberry

No 24221, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the role of financial frictions and firm heterogeneity in determining the investment channel of monetary policy. Empirically, we find that firms with low default risk – those with low debt burdens and high “distance to default” – are the most responsive to monetary shocks. We interpret these findings using a heterogeneous firm New Keynesian model with default risk. In our model, low-risk firms are more responsive to monetary shocks because they face a flatter marginal cost curve for financing investment. The aggregate effect of monetary policy may therefore depend on the distribution of default risk, which varies over time.

JEL-codes: D22 D25 E22 E44 E52 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: CF EFG ME
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Citations: View citations in EconPapers (87)

Published as Pablo Ottonello & Thomas Winberry, 2020. "Financial Heterogeneity and the Investment Channel of Monetary Policy," Econometrica, Econometric Society, vol. 88(6), pages 2473-2502, November.

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Working Paper: Financial Heterogeneity and the Investment Channel of Monetary Policy (2017)
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