Corporate leverage and monetary policy effectiveness in the euro area

Simone Auer, Marco Bernardini and Martina Cecioni (martina.cecioni@bancaditalia.it)

European Economic Review, 2021, vol. 140, issue C

Abstract: We study the relationship between corporate leverage and the sensitivity of industrial production to monetary policy shocks within the euro-area manufacturing sector. Using polynomial state-dependent local projections, we document a non-linear association. More indebted industries tend to adjust their production more strongly in response to a monetary policy shock, consistently with a financial accelerator framework. At high leverage ratios, this positive relation weakens until it reaches a point where additional leverage is associated with a decrease in sensitivity to monetary policy. We show that this dampening effect is particularly intense within the short-term horizon and in recessions; it emerges with both expansionary and contractionary shocks. Our results are consistent with recent studies analyzing the role of default risk in dampening the financial accelerator mechanism.

Keywords: Monetary policy; Financial heterogeneity; Polynomial state-dependent local projections (search for similar items in EconPapers)
JEL-codes: C23 E32 E52 G32 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292121002397
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Corporate Leverage and Monetary Policy Effectiveness in the Euro Area (2019)
Working Paper: Corporate Leverage and Monetary Policy Effectiveness in the Euro Area (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:140:y:2021:i:c:s0014292121002397

DOI: 10.1016/j.euroecorev.2021.103943

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu (repec@elsevier.com).