Collateral Heterogeneity and Monetary Policy Transmission: Evidence from Loans to SMEs and Large Firms

Cecilia Caglio, R.Matthew Darst and Kalemli-Özcan, Á¹¢ebnem

No 17175, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the role of heterogeneous financial frictions in investment and credit channels of monetary policy, using firm-bank matched administrative data for the U.S. We find that collateral heterogeneity in loan contracts explains the relaxing/tightening of financial constraints in response to monetary shocks. Small and risky firms rely on their earnings and intangibles as collateral, which means their leverage is backed by procyclical earnings. Monetary expansions lower the marginal cost of funds for these firms and expand their borrowing capacity. Monetary policy can be highly effective in economies dominated by small firms pledging their earnings and intangibles as collateral, even though these firms have high default risk.

JEL-codes: E32 E44 E52 G20 O16 (search for similar items in EconPapers)
Date: 2022-04
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