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Corporate leverage and monetary policy effectiveness in the euro area

Simone Auer, Marco Bernardini () and Martina Cecioni ()

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
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Working Paper: Corporate Leverage and Monetary Policy Effectiveness in the Euro Area (2019) Downloads
Working Paper: Corporate Leverage and Monetary Policy Effectiveness in the Euro Area (2019) Downloads
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DOI: 10.1016/j.euroecorev.2021.103943

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